2.6 Macroeconomic Objectives and Policies

Demand-side policies

Government strategies which aims to increase (expansionary policy) or decrease (contractionary policy) aggregate demand

Types of demand-side policies

Fiscal policy

Monetary policy

Fiscal policy

A policy implemented by the government, with the main instruments being government spending and taxation

Expansionary fiscal policy

G↑ or T↓ = AD↑; this creates a budget deficit = fiscal deficit = government deficit

Expansionary fiscal policy helps achieve economic growth, higher employment, and an improvement in the government’s long-run finances (as they spend less on benefits)

Contractionary fiscal policy

G↓ or T↑ = AD↓; this creates a budget surplus = fiscal surplus = government surplus

Contractionary fiscal policy helps achieve a trade surplus, better environmental standards, short-run government finances to improve (but long-run finances become worse as RDGP falls), and it helps control inflation

Monetary policy

A policy implemented by the Central Bank (Bank of England), not the government, with the main instruments being interest rates and quantitative easing/tightening

Supply-side policies

Government strategies which aims to increase an economies productive capacity (aggregate supply/long-run aggregate supply)

Types of supply-side policies

Market-based policy

Interventionist policy

Market-based policies

Interventionist policies