Strenghts And Weaknesses Of Demand Side Policiss

Question 1

What do demand side policies focus on

Answer 1

The use of monetary and fiscal policies to manage the level and rate of growth of AD to influence macro indicators such as unemployment and GDP growth

Question 2

What is important

Answer 2

Demand and supply-policies do not operate in isolation

Question 3

What do effective demand-side policies help to do

Answer 3

Stimulate aggregate supply

Question 4

What do successful supply-side policies help to do

Answer 4

Create their own positive effect in AD

Question 5

Examples of demand side policies during an economic slowdown/recession

Answer 5

• lower interest rates
• QE
• depreciation of the XR

Question 6

What challenges the effectiveness of demand side policies during an economic slowdown / recession

Answer 6

• low confidence
• low interest elasticity of demand
• low PED for exports
• limits to government borrowing
• real interest rates

Question 7

How can business and consumer confidence question the effectiveness of demand side policies in a recession/slowdown

Answer 7

• reduction in tax may be saved rather than spent

- low interest rates may not stimulate business investment if confidence is low

Question 8

How can low interest elasticity of demand question the effectiveness of demand side policies in a recession/slowdown

Answer 8

• cuts in interest rates may not cause higher demand if investment is low
• if very low interest rates are ineffective = liquidity trap

Question 9

How can low PED of exports question the effectiveness of demand side policies in a recession/slowdown

Answer 9

-demand for exports may have a low PED meaning the effect of lower prices will be relatively small

Question 10

How can limits to government borrowing question the effectiveness of demand side policies in a recession/slowdown

Answer 10

Expanding demand can come from increase GS or decrease T.
But a rise in gov borrowing may = higher interest rates (form of crowding out).
Doubts of the size of the fiscal multiplier effect .

Question 11

How can real interest rates question the effectiveness of demand side policies in a recession/slowdown

Answer 11

Nominal interest rates can be cut close to zero but if there is deflation then real interest rates can actually rise leading to a contraction of AD