2.6.2i - strengths and weaknesses of demand side policies

Question 1

What policies do keynesian economists favour

Answer 1

favour the use of both fiscal and monetary demand-side policies when the economy is in recession or is growing so fast that inflation begins to increase

Question 2

What policies do classical economists favour

Answer 2

Classical economists tend to argue that fiscal policies are ineffective and governments should rely solely on monetary policy to influence aggregate demand, if at all.

Question 3

State 7 points that help evaluate demand side policies

Answer 3

• speed of adjustment
• conflicting policies
• national debt
• rate of interest
• qe
• size of the multiplier
• time lags
• finetuning

Question 3

What do Keynesian economists think of speed of adjustment?

Answer 3

• an economy could be in short-run disequilibrium
  for years and even decades bc of a lack of demand.
• If consumers, firms and governments all spend less than is needed to get the economy to full employment, then the
  economy can remain depressed for a long time

Question 4

What do classical economists think of speed of adjustment?

Answer 4

• economies adjust very quickly.
• If there is long-term unemployment, for example, with no
  economic growth, this is not because there is recession in the economy.
• It is because there are supply-side problems in the economy.
• Using demand-side policies to get a stagnant economy moving again will have no effect.

Question 5

What is meant by conflicting policies

Answer 5

high unemployment and the economy is in recession…
- Key: use both expansionary fiscal and monetary policies to get the economy back to growth
- right wing economists: contractionary fiscal, expansionary monetary (costs of increasing the National Debt from
expansionary fiscal policy are greater than any benefits to aggregate demand that might result.)

Question 6

What is the con of expansionary fiscal policy being used to increase AD?

Answer 6

National debt will increase so short term benefit of AD increase offset by negative impact of rising national debt

Question 7

Why do keynesian economists think expansionary fiscal policy is ok?

Answer 7

So long as a government can print money to finance its deficit without fuelling inflation or borrow money from the financial markets, then the National Debt is not a problem in the short term

Question 8

ref to booklet page 16 for time lags finetuning QE size of mutlipkeur