Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy)

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Discuss the strengths and weaknesses of demand-side policies (fiscal and monetary policy) [18]

        Demand-side policies are a government’s attempts to influence the level of growth of aggregate demand and hence the levels of employment, real GDP, inflation, growth and balance of payments position. A government will do this by using fiscal and monetary policies. Fiscal policies involve the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Monetary policies involve the use of interest rates to control the level and rate of growth of aggregate demand in the economy.

Different types of demand-side policies can be used depending on the position of inflation in an economy.

Reflationary demand-side policies seek to increase aggregate demand and raise the level of planned expenditure at or near the level of potential GDP.

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Deflationary demand-side policies decrease aggregate demand in the event of aggregate demand running ahead of aggregate supply and posing inflationary risks or leading to an unsustainable deficit on the balance of payments.

An example of when reflationary demand-side policies would be used is when aggregate demand is too low, so for instance when taxes are high and interest rates are high. The policies that would be used in order to shift out the aggregate demand curve would be lowering taxes and government spending, fiscal policy, and decreasing interest rates, monetary policy. This would shift the curve outwards due to the nature ...

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**** The writer covers the main points but mixes up fiscal and monetary policy. It would have been better to have dealt with them separately. S/he should also explain the transmission mechanisms, ie how they affect aggregate demand, more clearly.