Demand-Side Policies

Strengths + Weakness of Demand-Side Policies

• The speed of adjustment is how quickly an economy can correct itself and revert to long-term equilibrium after an output gap is created

• The Keynesian view is that an economy could be in short run disequilibrium and an output gap could be present for multiple years due to a lack of aggregate demand

• They believe that expansionary demand side policies are required to increase the level of demand in the economy and get it back to full employment and long term equilibrium

Speed of Adjustment

Conflicting Policies

• If there is high unemployment and the economy is in recession, then Keynesian economists would argue that governments should use both expansionary fiscal and monetary policy to stimulate growth

• They argue that increasing the level of demand in an economy is the best way of getting one out of recession and this should be done despite the level of national debt

National Debt

• National debt is the total money owed by government to creditors. It builds up over years and years due to budget deficit which is caused by gov spending being higher than taxation

• Expansionary fiscal policy can be used on the demand-side to increase Aggregate Demand, however this can increase the size of national debt

• Keynesians argue the benefits of AD in the short term outweigh the negative impacts of national debt. This can help an economy get out of recession and back towards full employment

• They say as long as a govevernment can print money without causing inflation or borrowing from financial markets then nanti on national debt is not problem in short term (however can be big problem in long term)

Rate of Interest

• An interest rate is the reward for saving and the cost of borrowing expressed as a percentage of the money saved or borrowed

• Generally, economists agree that the interest should be cut to stimulate aggregate demand in a recession

• However this had little impact due to the severity of the situation in 2008 and quantative easing had to be utilised

• Keynesian economists back this idea and believe in expansionary monetary policy to stimulate Aggregate Demand