Ch 17 - Demand Management (demand-side policies)

Quantitative easing

Quantitative easing

________: when banks buy bonds to lower the interest rates on savings and loans.

Political costs

________: increasing taxes imposes problems on consumers.

Fiscal policy

________: involves the government changing the levels of taxations and government spending in order to influence aggregate demand and the level of economic activity.

Monetary policy

________: involves cutting or raising interest rates.

Expansionary monetary policy

________: expands monetary supply faster than usual or lowering short term interest rates.

AD (aggregate demand)

is the total level of planned expenditure in an economy

Purpose of Fiscal policy

• Stimulate economic growth during a period of recession

• Keep inflation low

• Stabilise economic growth

Expansionary fiscal policy

are policies that are intended to increase aggregate demand while contributing to deficits or drawing down budget surpluses.

Purpose of expansionary fiscal policy

• Involves increasing AD

• Government will increase spending and cut taxes

• Lower taxes increase government spending → more disposable income

• Will worsen the government budget, governments will need to increase borrowing

Deflationary Fiscal policy:

involves higher taxes and lower spending. This will reduce the growth of aggregate demand and could lead to lower growth or even negative economic growth

Effects of Deflationary fiscal policy

• Decreasing AD

• Governments will cut government spending and increase taxes

• Higher taxes → reduce consumer spending

• Improves government budget deficit

Fine tuning

maintaining a steady rate of economic growth using fiscal policy

Demand Management policies

efforts to influence the level of aggregate demand (AD) in an economy. Main types: monetary and fiscal policy

Expansionary monetary policy

expands monetary supply faster than usual or lowering short term interest rates

Demand Management policies

efforts to influence the level of aggregate demand (AD) in an economy

Expansionary monetary policy

expands monetary supply faster than usual or lowering short term interest rates

Cost push inflation

occurs when the economy experiences rising prices due to higher costs of production and higher costs of raw material

Demand pull inflation

occurs when aggregate demand grows faster than aggregate supply