Demand side policies

fiscal policy

changes to government spending and taxation in order to influence aggregate demand

expansionary fiscal policy

increase AD, boost growth, reduce unemployment, reduction in income and corporation tax

contractionary fiscal policy

decrease AD, reduce budget deficit, redistribute income, reduce current account deficit.

monetary policy

changes to interest rates, money supply and exchange rates by the central bank to influence aggregate demand

contractionary monetary policy

policies to reduce AD

reduce inflation, promote saving, as there is higher interest rates, reduces the current account deficit, as when incomes fall there is less spending on imports.

expansionary monetary policy

policies to increase AD

cut interest rates, increase demand pull inflation if inflation is under target, reduce unemployment

quantitative easing

increases the supply of money in an economy, used when traditional approaches to monetary policy have failed.

1. central bank creates money electronically

2. money is used to buy bonds from financial institutions

3. interest rates fall

4. consumers and firms borrow more

5. spending rises and jobs are created

6. AD rises, leading to economic growth.