demand side policies (macro)

fiscal policy

changes in government expenditure and government policies
- direct, indirect taxes, sales of public goods and services, privatizations (revenue)
- subsidies, current expenditures, day to day expenditures, public investments, transfer payments (expenditure)

government budgeting

- balanced budget (spending = revenue)
- surplus revenue (spending < revenue)
- deficit revenue (spending > revenue)

expansionary fiscal policy

correcting a recessionary gap
- increasing government spending
- decreasing income and business taxes to increase public spending

contractionary fiscal policy

correcting an inflationary gap
- decreasing government spending
- increasing income and business taxes to decrease public spending

income taxes

- progressive income taxes
- regressive income taxes

transfer payments

unemployment benefits

strengths of fiscal policy

- targets specific economic sectors
- effective in pulling economies out of recession
- affects output and leads to economic growth

main objective

to eliminate or reduce economic fluctuations

economic fluctuations

deflationary and inflationary gaps

method

manipulating aggregate demand

weaknesses of fiscal policy

- major time delays in implementation
- political constraints
- expansionary may turn into inflation and vice versa
- can't be used incrementally
- makes recession worse during cost-push inflation

monetary policy

carried out by the central bank via changes in the interest rates through the money supply

functions of the central bank

- exchange rate policies
- bank to the government
- bank to other banks
- regulator
- determiner of interest rates

interest rates

payment for money borrowed over a period of time as a %
- by increasing the interest rates, the money supply decreases
- by decreasing the interest rates, the money supply increases

expansionary monetary policy

corrects a recessionary gap
- reducing interest rates and increasing money supply
- leads to more consumption and investment spending

contractionary monetary policy

corrects an inflationary gap
- increasing interest rates and decreasing money supply
- leads to lowered consumption and investment pending

strengths of monetary policy

- no political constraints
- can be adjusted incrementally
- quick to implement
- doesn't increase budget deficits and debts

weaknesses of monetary policy

- not effective in deep recession
- may become inflationary while using expansionary policy for too long and vice versa
- worsens cost push inflation