Th2.6: Evaluation of Demand-side Policies

Question 1

What do classical economists argue about any demand management?

Answer 1

whether fiscal or monetary, it will have no effect on long-run output so supply side policies should be used

Question 2

What do classicists believe about about increasing AD during a depression?

Answer 2

increasing AD during a depression will have no effect other than to increase prices

Question 3

What do classicists think about short-run disequilibrium in comparison to Keynesian economists?

Answer 3

if the economy is in short run equilibrium, it will quickly return to long-run equilibrium, whilst Keynesian argue that it can be in the long-run equilibrium for years

Question 4

On a Keynesian LRAS, what does the impact on changes in AD depend on?

Answer 4

where the economy is operating - if the economy is at full employment then a rise in AD will only lead to higher prices. however if unemployment is very high, then a rise in AD will only lead to a higher output

Question 5

What do both policies see?

Answer 5

significant time lags between their introduction and their full effect

Question 6

What is the biggest issue of demand-side policies?

Answer 6

in most cases, an expansionary policy is inflationary whilst a deflationary policy brings unemployment

Question 7

What does the biggest issue of demand side policies depend on?

Answer 7

the elasticity of the curve and the curve which you perceive to be correct (classicist or Keynesian) but holds in most scenarios

Question 8

What can the government not do through demand management therefore?

Answer 8

bring about both low and stable inflation and high economic growth / low unemployment