Grade 8A IGCSE
_________________________________Penabur International- Jakarta________________
- 5.1.3:Discuss whether the demand side policy instruments are always more effective in achieving the macroeconomic objectives than supply side policy instruments.
Last date for Submission:
May 11th, 2014
Please Write Your Response in 750 Words
Note:
Marks allocation for this article is 20.
Rubrics for Marks.
A. Theoretical Explanation 5 Marks
B. References. 5 Marks [Use Harvard referencing style]
C. Use of Key words. 5 Marks
D. Evidences in the support of explanations 5 Marks
There are four main objectives of a government that includes low and stable inflation, high and stable employment, economic growth, and position in international trade. Another two which include low inequality and sustainable economic development.
ReplyDeleteInflation is a general and sustainable rise in price level in a specific period of time or more aggregate demand than aggregate supply. There are problems arises due to rising inflation such as decrease in people disposable income, increase in poverty, fall in value of money, and lower standard of living. Germany in 1923, prices doubled every week. Workers would be paid several times a day, and would immediately rush out and spend their wages. People had to bring wheelbarrows full of money to buy one loaf of bread. All of this results in time and resources being devoted to inflation-related activities instead of the production of goods and services, this is the example of a problem resulted from rising inflation. But there are also parties which is benefited from inflation such as debtor and producer. Debtor is benefited because they pay less amount of money. Producer is also benefited as increasing demand increase production and rise profit of the business. It also increase aggregate supply in a country which can decrease inflation. Also increase employment as demand and production increases. It also can increase income tax revenue for government.
Unemployment is the condition when willing worker ready to work at existing wage rate but fails to get a job. Problems arises due to unemployment are decrease in disposable income, less aggregate demand, less social tensions, and increase in public expenditure. The unemployment arise from government shutdown in United States increase unemployment critically such that many civil servants that are unemployed temporarily decrease their disposable income.
Economic growth can be observed by looking the increase of national income. In less economic growth countries there are less per capital income, less disposable income, and less tax collection. International trade is trade with rest of the world which involve export and import between countries.
ReplyDeleteThere is two policy instrument in a government which is demand side supply instrument and supply side policy instrument. Both of the instrument use fiscal and monetary policy to achieve those objectives. Supply side policy instrument use expansionary fiscal and monetary policy which aim to increase aggregate demand to achieve government objectives. Demand side policy instrument use contractionery fiscal and monetary policy which aim to decrease aggregate demand to achieve government objectives. Government use demand side policy instrument in time of prosperity and supply side policy instruments in time of recession. Supply side policy instrument influences specific public expenditure, changes in individual taxes, and new rules and regulation. Demand side policy instrument influences total public expenditure, overall expenditure, and rate of interest.
Fiscal policies are the policies undertaken by government in form of public revenue, public expenditure, and public borrowings. Public revenue can include tax which can be direct or indirect tax. Direct tax is the tax which is paid directly to government such as income tax. Indirect tax is the tax which is paid indirectly to the government such as service tax. Public expenditure includes public goods and services, public sector enterprise, infrastructure, capital investments, internal and external security measures, and current expenditure. Monetary policy instrument deal with money which is done by central bank. It includes interest rate, bank rate, cash reserve ratio, and statuary liquidity ratio.
In demand side policy instrument in order to decrease inflation government can charge higher direct tax to decrease disposable income and decrease overall expenditure so that demand will decrease as well as inflation. Government also can increase rate of interest so that people borrow less and decrease aggregate demand so inflation will decrease.
ReplyDeleteIn supply side policy instrument government can make new rules and regulation that reduce corporate tax that will encouraged multinational company to invest on a country so can trigger low unemployment and more economic growth. Government also can decrease individual of direct tax so that more people are more motivated to work and unemployment will start to decrease.
The conclusion is that I do not agree that demand side policy instrument are always more effective in achieving macroeconomic objectives than supply side policy instrument as they compliment each other to achieve government objectives.
References :
http://www.oswego.edu/~edunne/200ch7.html
Economic notebook
87% unique content
As we know from one section before, to reach macroeconomic objectives government need economic policies as a tools. Those policies can be seen by two side, demand side and supply side. Every policy has good impact and also brings some negative impact. All those impacts will be government’s consideration to choose what policy to be applied in some condition of the country so the government objectives can be achieved well with the lowest possibility of negative impact.
ReplyDeleteFrom demand side, we can find fiscal policy and monetary policy. Fiscal policy involves varying the overall level of public expenditure and/or taxation in an economy to manage aggregate demand (total spending on goods and services) and influence the level of economic activity. Then, monetary policy is changes in the supply of money by a nation's central bank aimed at rising or lowering the prevailing interest rates in the economy, which subsequently affect the level of consumer and investment spending.
Fiscal policy from demand side can be divided into two advantages, expansionary policy and contractionary policy. If a governments wants to increase aggregate demand in the economy to boost employment and output, it can increase its expenditure and/or reduce taxation , it is called as expansionary fiscal policy. Expansionary policy is usually implemented when economic downturn or recession, when private sector demand for goods and services is low or falling and unemployment in the economy is high as a result. Then, contractionary policy aims to reduce pressure on prices in the economy by cutting aggregate demand through a reduction in public expenditure and/or by raising total taxation. Fiscal policy instrument can also used to redistribute income between rich and poor people in an economy. Government can taxing people who have high income then that tax revenue can be used to support people with low income or those unable to work because they are old, sick or unemployed. For example, in Indonesia government applied progressive fare for tax income, the higher the income the higher the tax. Those tax revenue can be used to build infrastructure such as building, road, bridge, transportation and many others.
There is also disadvantages of fiscal policy on demand side : it is cumbersome to use. Cumbersome means difficult. By using the fiscal policy on demand side, government hard to know precisely when and how much to expand public spending or cut taxes by during economic turn down. The second disadvantage is that it increases public expenditure crowds out private spending. To finance an increase in public spending and/or a cut in taxation a government may need to borrow the extra money it needs from the private sector. The more money the private sector lends to government, the less government can spend itself. This is what we called Crowding Out. The third disadvantages are increasing taxes on income and profits can reduce incentive to work and enterprise. If taxes are increasing or in a high level, there might be a chance that it can reduce work effort or it can also reduce labor productivity. If labor productivity reduces, the total output and profits can change. If the productivity falls, the cost of production in a firm will increase. And there will be also less competition on products price, quality of the product against effective producers. If this happens, then unemployment will increase and also the demand for goods and service will decrease. The fourth disadvantage is expansionary fiscal policy creates expectation of inflation. In the future there will be a rising in inflation following an expansionary fiscal policy, especially if attempts by their government in the past to boost demand and economic activity have caused the economy to overheat. If government cut taxes, it will cause employees to push for higher wages to protect them from an increase in their cost of living they fear will occur in the future. Raising wages increase production cost, and reduce demand of labor. Finally the very bad impact of all that domino effect is it can cause a cost-push inflation and rising an unemployment.
ReplyDeleteFrom supply side policy, we can find several instruments. Those instruments are : selective tax incentives, selective subsidies, improving education and training, labor market reforms, competition policy, removing trade barriers, privatization and regulation deregulation.
So, we can conclude that the can use demand side to make their economic policy. If we use supply side, it will be difficult to rise the taxes to the producers. Eventually if government increases the taxes to the producers the producers will also increase the prices of goods and service to the consumer. This will be a negative side to the consumer side which is the demand side. But, government also need to consider from demand side because can touch the last cycle of production which means that the product almost meet with the buyers and it will be easier for government to control it.
References:
www.welkerswikinomics.com
http://www.slideshare.net/ajmccarthynz/34-demand-and-supply-side-policies
Economic book
unique content 96%
ReplyDeleteBy : Jennifer 8A
ReplyDeleteTo control the macroeconomy, the government uses policy instruments. They are, demand-side and supply-side policies. Demand-side policies influence aggregate demand, and supply-side policies influence aggregate supply.
Both policies are equally useful when used at the right condition. Supply-side poicies are used to boost supply to satisfy demands. Demand-side policies are used to boost demand to help firms gain more revenue to invest in new productive capacity and boost employment.
There are 2 types of demand-side policies, expansionary and conractionary fiscal policy. The expansionary fiscal policy is best used at the economic recession when demand falls so that many firms close down and people become unemployed. It raises demand by cutting taxes. Cutting taxes on profit gives firms the incentive to increase output and invest in new productive capacity. Cutting taxes on income encourage people to work.
The contractionary fiscal policy cuts aggregate demand to reduce pressure on prices caused by inflation, which is caused by too much aggregate demand. Cutting public sector wages and raising income taxes reduces consumer spending. It is also used to raise tax revenues.
Supply-side policies are used to control aggregate supply. It also has a role in controlling the economy, especially to increase supply of important goods and services. It includes, trade barriers on imports, subsidies to certain products, competition policies, and rules and regulations. It is mostly used on important products that are needed in great supply.
Selective tax incentives involves cutting taxes on income and profits. It encourages people to start up businesses and workers to get paid jobs. Cutting taxes encourage firms to invest in productive capacity and increase demand for labour.
Selective subsidies are used to fund research and development and reduce prices on important goods and services, such as health care and technology. It is also used to help education.
To increase imports, especially important goods, taxes are lowered to reduce trade barriers. The opposite can be done to restrict trade of illegal goods, such as drugs, and to restrict free trade.
Competition policies are used to prevent monopolies. The government also support starting up businesses to restrict monopolies from taking over the market and supply of the good or service.
However, there may be problems caused when he wrong policy is used at a certain condition. One example would be, the economic recession at 1929-1934. At that time, supply increased greatly but there’s no demand. The supply-side policy used will worsen the condition. It was the first time the demand-side policy, created by J.M.Keynes, is used. It helped the economical conditions get better.
The supply-side policies worsens the condition when demand is low, especially at recessions as told before. It increases supply even more it may cause inflation. Supply will be useless if no one wants to buy it. Lowering taxes on income gives people more disposable income, which may be used to buy imports, that increases national spending in the international trade.
Demand policies can also cause problems. Raising aggregate demand can cause inflation. Cutting taxes to raise demand can cause a budget deficit, a condition when public expenditure exceeds revenue, so that government needs to borrow from private sector. Increasing taxes to control inflation may cause unemployment and reduce the incentive to start businesses or to invest.
Both demand-side and supply-side policies are equally useful and equally important. Each is needed at a certain economic condition. If used correctly, it would be very useful to achieve the macroeconomic objectives.
Demand-side policies aim to deal with the aggregate demand of a country, and those who believes that this type of policy works effectively is known as Keynesian Economists. Keynesian economists believe that savings and investments are sometimes unequal, producers may lower their output instead of prices to reduce inventory, lower production may increase unemployment and reduce income, and that the power from monopoly that producers and labour unions may have would prevent prices and wages to freely adjust itself in a “downward” direction. On the other hand, Classical Economists have more faith in supply-side policies. They believe in Say’s law, which states that supply will create its own demand. Excess income should be matched by an equal amount of investment by the business. Wages, interest rates, and prices would be flexible. Classical economists also believe that since the market is self-regulatory, there is no need for interference. Some people say that these classical economists are advocating the laissez-faires approach.
ReplyDeleteKeynesian economists, or people who would alter and affect the aggregate demand rather than aggregate supply, are relatively new compared to the classical economists, who believe otherwise, when the great depression seemed to defy Say’s law. Demand side policy instruments can be applied in either or both of the conditions that an economy may be in, including prosperity and recession. In a prosperous economy, the overall economy is doing well, and most people have sufficient income. Businesses are hiring workers and finding jobs become relatively easier. In a situation of prosperity, contractionary fiscal and monetary policies may be needed to reduce the aggregate demand in the economy. We can alternately define aggregate demand with a formula, which states that AD = C + I + G + (X-M), wherein “AD” is the Aggregate Demand, “C” is the overall household consumption, “I” is firm investment, “X” is the total exports from the country, and “M” is the total imports into the country. Hence, aggregate demand can be reduced in a number of ways. Contractionary Fiscal policies can significantly affect aggregate demand. The government can increase both or either direct or indirect tax, which will reduce the general amount of disposable income, hence they will consume less, and aggregate demand may fall. An increase in corporate tax will decrease investments in the firm, hence contributing to a decrease in aggregate demand.. Contractionary monetary policies may involve the increase of interest rates to reduce household consumption. The Fed fund rate can be increased to ultimately reduce aggregate demand. This is the rate at which banks charge each other in order to meet the Federal Reserve requirement, which is the amount banks are required to have on deposit every time they close their books, which is generally 10%. By raising the Fed fund rate, banks will charge higher interest rates on their loans in order to compensate for the higher Fed fund rate. Therefore businesses borrow less, and they won’t expand as much, hire fewer workers, and ultimately decreasing the aggregate demand as numerous businesses does the same things. Simply raising the Federal Reserve Requirement is generally not applied mainly due to its disruptive effects on banks. In the economic situation of a recession, wherein there is an excess of aggregate supply and shortage of aggregate demand, expansionary fiscal and monetary policies may be undertaken by the government. These are basically the opposite of contractionary fiscal and monetary policies, but instead aim for an increase in aggregate demand, hence the term “expansionary” is used.
In contrast, supply side policies may be undertaken by classical economists. As said before, classical economists tend to believe that as long there is a supply of a good or service, demand is automatically created, hence they will only try to manipulate or influence the aggregate supply of an economy or a country. Supply side objectives may include: improvement of incentives and invest in people’s skills, rise in capital and labour productivity, increase in geographical and occupational mobility of labour, increase of research and development and capital investments spending by firms, promotion of more competition as well as stimulating a faster pace of innovation or invention, provide a platform for a sustainable and non-inflationary economic growth, and encouragement of starting up and expanding new firms/enterprises. In supply side policies, there are 2 different approaches in influencing the aggregate supply of a country, which is market-based and interventionist. Market-based policies include cutting of government spending, taxes, and policies to cut government borrowing, laws on controlling the power of trade unions, reduction of “red-tape” to cut the costs of running a business, measures to improve the flexibility of the labour market, policies to boost competition such as strict anti-monopoly and anti-cartel laws, as well as deregulation, etc. Interventionist policies include: a key role of states in investing in public services and building critical infrastructures, incentives on tax and welfare reforms to encourage people to work, management of the exchange rates to improve competition among export industries, nationalisation of some key firms and industries, and many more. Another 2 broad approaches to the supply side includes product market and labour market. The product market focuses on goods and services produced and sold to consumers, while the labour market is affecting the market where labour is bought and sold. Supply side policies in product markets are aimed at increasing competition and efficiency, whilst the labour market is aimed at improving the quality and quantity of the supply of labour available to the economy.
ReplyDeleteTo conclude what we have discussed, demand side policy instruments are generally more effective in achieving the macroeconomic objectives of governments, mainly due to the fact that it is relatively simple to undertake expansionary or contractionary fiscal and monetary policies, even if it may increase burdens on the consumers, specifically the less wealthy populations in a country.
Ivan Alexander, 8A
Originality 99% based on http://smallseotools.com/plagiarism-checker/
Reference:
Complete Economics for IGCSE and O level by Brian Titley and Dan Moynihan Chapter 5.1
Economics Notebook pages 35-37
http://staffwww.fullcoll.edu/fchan/macro/3classical_and_keynesian_economics.htm
http://www.slideshare.net/ajmccarthynz/34-demand-and-supply-side-policies
http://www.investopedia.com/terms/k/keynesianeconomics.asp
https://answers.yahoo.com/question/index?qid=20090520123613AAkSEpa
http://useconomy.about.com/od/glossary/g/Contractionary.htm
http://wiki.answers.com/Q/What_is_economic_prosperity?#slide=6
http://www.ask.com/question/contractionary-fiscal-policy
http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
Demand side policy is policies that affect aggregate demand. Demand-side fiscal policy is what is commonly known as fiscal policy. This focuses on government to shift the aggregate demand in or out depending on whether unemployment or inflation is the most issue. When unemployment is the problem, the government wil carry out the fiscal policy to shift demand out by decreasing taxes and increasing spending. If inflation is the problem, the government will try to make the prices stable by shifting demand in though increasing taxes so spending is decrease. The two policies, are not effective when unemployment and inflation are problems they are facing. Thie problemis called stagflation, is when supply shifts in, due to variety of factors, which increases the price and decreases quantity/ GDP. If the government tries to manage unemployment, inflation will occur. If the government tries to manage inflation, unemployment will increase. To solve this problem, the government will use the supply-side policies, to help businesses to produce more which could solve both unemployment and inflation. This could occur by decreasing direct taxes so that companies would produce more and be able to hire more workers to work for them. Both demand and supply side policy are effective to achieve the governement objectives, but the government usualy use the demand side policy to get their objectives and they also use the supply side policy to manage and achieve there objectives which are mostly in inflation and unemployment. Supply side deals with the economy focused more on production. It is assumed that all that is produced good will be automatically consumed and there is no need to encourage consumption. Government policies are aimed at improving productivity in the business, so that more things are available for people to buy. Specifically, a policy of decreasing taxes to encourage capital investment. Demand side economists invented the madness of "underconsumption". To encourage policies aimed at motivating people to spend money, before they actually produce goods, hoping that this demand will encourage more production. Most often, the government is the one that create this demand.
ReplyDeleteThe conclution is I agree that demand side is more effective to achieve government’s objectives because the demand side policy is more use and could achieve the objectives at faster and easier like decreasing the tax to make people to purchase more good and reduce inflation.
Reference:
1. http://www.investopedia.com/terms/s/stagflation.asp
2. http://www.tutor2u.net/economics/revision-notes/as-macro-macroeconomic-policy.html
93% original
Robin 8a
Macroeconomy is the field of economics that studies the behaviour of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. There is government intervention in the macro economy, The reality is that all governments intervene through their macroeconomic policies in a bid to achieve certain policy objectives , for examples, fiscal policy and monetary policy and improve the overall performance of the economy. As usual, the government uses demand side rather than supply side to manage the macro economy. The reason is because demand side has more advantages than supply's side.
ReplyDeleteDemand management occurs when the government attempts to influence the level and growth of AD hence the levels of national income, employment, rate of inflation, growth and the balance of payments position. Reflationary policies seek to increase AD and raise the level of planned expenditure at or near the level of potential GDP
Deflationary policies decrease AD in the event of aggregate demand running ahead of AS and posing inflationary risks or leading to an unsustainable deficit on the balance of payments. We will focus on fiscal and monetary policies as the main instruments of demand management. Fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment. Monetary policy involves the use of interest rates to control the level and rate of growth of aggregate demand in the economy.
Supply-side economic policies are mainly micro-economic policies designed to improve the supply-side potential of an economy, make markets and industries operate more efficiently and thereby contribute to a faster rate of growth of real national output. supply-side policy can take a long time to work its way through the economy. For example, improving the quality of human capital, through education and training, is unlikely to yield quick results. The benefits of deregulation can only be seen after new firms have entered the market, and this may also take a long time.In addition, supply-side policy is very costly to implement. For example, the provision of education and training is highly labour intensive and extremely costly, certainly in comparison with changes in interest rates.Furthermore, some specific types of supply-side policy may be strongly resisted as they may reduce the power of various interest groups. For example, in product markets, profits may suffer as a result of competition policy, and in labour markets the interests of trade unions may be threatened by labour market reforms.Finally, there is the issue of equity. Many supply-side measures have a negative effect on the distribution of income, at least in the short-term. For example, lower taxes rates, reduced union power, and privatisation have all contributed to a widening of the gap between rich and poor.
In My opinion, demand side is more effective than supply side, because demand side is helped by government intervention and policy such as fiscal policy and monetary policy. While supply side is not helped by government and take more long time to develop macroeconomy.
reference:
www.investopedia.com
www.economicsonline.com
www.tutor2u.com
originality: 80
There are four macroeconomic objectives , those are low and stable inflation, high and stable employment , managing trade international ( stable balance of payment), high and stable economic growth. Government economic policy have 2 instruments , demand side policy and supply side policy. Monetary policy and fiscal policy are parts of demand side policy. Fiscal policy measures public borrowing and debt, public revenue, and public expenditure .There are two types of fiscal policy, expansionary fiscal policy, and contractionary fiscal policy. Expansionary fiscal policy used to increase aggregate demand, to boost employment , increase expenditure, reduce taxation. Contractionary used to reduce pressure on price in the economy, cutting aggregate demand, decrease expenditure, rising taxation. Fiscal policy can effect the distribution of disposable income. So inequality can be reduced. Monetary policy is used to control interest rates and bank rates.supply side policy instruments include the following : selective tax intensive, selective subsidies, improving education and training, labor market reform, competition policy, removing trade barriers, privatization, regulation and deregulation.
ReplyDeleteDemand side policy is useful for the problem that suddenly happens. Supply side policy, they are designed to the boost productive potential of an economy and increase the aggregate supply of goods and services. Supply side policy can help achieve all macroeconomic objectives of government at the same time but over the long run. Supply side policy are used to influence the behaviour of consumer and producers. As we know, to change the behavior of people, it takes a long period of time and hard to achieve. Meanwhile demand side policy is designed to varying the overall level of public expenditure and taxation in an economy to manage aggregate demand, and influence the level of economic activity. These are easier if done by government because government only need to make the rules that only role the market condition like : price, interest rate.
There are some problems in demand side policy especially fiscal policy. There is not a clear trade off between higher levels of inlfation and lower levels of unemployment . the problems are: fiscal policy is cumbersome to use, increase in public expenditure, crowds out private spending ,increasing taxes on income and profit can reduced intensive to work and enterprise, and expansionary fiscal policy create expectation of inflation.it is difficult for a government precisely when and by howmuch to expand public spending or cut taxes by during an economic downturn. To finance an increase in public spending and cut in taxation a government may need to borrow the extra money it needs from the private sector. The More money the private sector lends to a government the less it has available to spend it self. This is called crowding out. If taxes are to high, people and firms may reduce their work effort. This will reduce labor productivity , total output, and profit. As productivity falls the cost of production will increase, and they will be less able to compete on product price and quality against another producer overseas. As a result, demand for their goods and services may fall and unemployment may rise. With government boost up and economic activity have cause the economy to over height. As a result, if their current government announce it will cut taxes and increase to boost output and growth employee may push for higher wages because of the increase in their living cost. Rising wages will increase production cost and reduce the demand for labor. This in turn may cause a cost-push inflation and rising unemployment
To be concluded, Demand side policy will be more effective because government effect the aggregate demand, because effecting the demand is much more easier than effecting the supply. Government controls aggregate demand by using taxes. If government increase tax, lower disposable income, lower aggregate demand. To increase aggregate demand, Government increase taxes.meanwhile effecting the supply is harder, because government have to deal with the producers, and not all producers want to dealing with government
ReplyDeleteOriginality : 91% Unique Content
Reference : Economics note book
Complete economics for cambridge IGCSE second edition
Government play important role in the economy of a country. In controlling a particular country, government has several objectives, called macroeconomic objectives that are needed to be achieved. These objectives include, low and stable inflation, high and stable employment, high and sustainable economic growth, and managing International trade – BOP. In order to achieve all of these objectives, government create policy instruments (macroeconomic policy instrument), which are the methods or tools through which government undertake. There are two types of policy instrument, demand side policy and supply side policy. Demand side policy will effect and manipulate the aggregate demand, and it effect the aggregate demand curve. While, supply side policy will effect the aggregate supply and it is used to raise output and employment. There are two types of demand side policy, fiscal policy and monetary policy. We will discuss more in the next paragraph.
ReplyDeleteDemand side policy are related to consumer. A demand sider, Keynesian, believe that it is require to stimulating demand to getting an economy out of rut. Which mean that demand sider want to stimulate consumer spending. There are two types of economic situation, prosperity and recession. Prosperity is the situation where aggregate demand is greater than aggregate supply, and recession is the situation where aggregate demand is greater than aggregate supply. Demand side policy can be done in both of this situation. In prosperity, government need to use contractionary fiscal and monetary policy to reduce the aggregate demand. So, as the result, it can reduce the increasing of price, caused by inflation. There is a formula that involve aggregate demand (AD), AD = C+I+G+(X-M), ‘C’ means household consumption, ‘I’ stands for the firm’s investments, ‘G’ means the government export, ‘X’ for the total export and ‘M’ for the total import for the country. In prosperity, government needs contractionary fiscal and monetary policy. Government should reduce the total public expenditure, reduce overall expenditure, and increase the rate of interest to make AD balance with AS. As it is said before, a deflation or contractionary fiscal policy reduce pressure on prices in the economy by cutting the aggregate demand through reduction in public expenditre and by raising total taxation, as the result it will reduce the total disposable income and consumer expenditure. We also can increase tax on those with the highest income and money raised can be used to finance more public services and increase welfare for people on the lowest income, or those unable to work because of unemployed. Contractionary monetary policy involve raising interest rates and cutting the money supply to reduce aggregate demand if the economy is inflationary pressures are rising. However, reducing aggregate demand can cause in rising of unemployment and might hurt future economic growth.
Supply sider believes that stimulate business investment is the best way to stimulate an economy. In the seventies, supply side revolution was high taxes and an inflation driven decade of stagnation of the genesis. There are three key areas that government need to focus on to influence the aggregate supply in an economy, labour market, capital market and goods market. Supply side policy may worse the condition, especially when the demand is low at the recession. And when the supply is high, it might cause inflation. When we reduce the amount of tax, disposable income can increase and can be used to buy imports which will increase the international trade-BOP. In recession, government need to reduce tax and increase public expenditure.
ReplyDeleteIn conclusion, demand side policy can be more effective in achieving the macroeconomic objectives than the supply side policy. But in order to make effective, we need to use both of the policy at the correct economic condition at that period of time.
Vienetta christina 8a
Originality : 98% originality (http://plagiarisma.net/)
References :
1. complete economics for cambridge IGCSE and O Level
2. http://theeprovocateur.blogspot.com/2008/12/demand-side-vs-supply-side-economics.html
3. http://www.economicsguide.net/mv/a-level-tutorials/managing-the-economy/macroeconomic-policy-instruments/
4. http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
5. http://mrshearingeconomics.weebly.com/supply-side-policy.html
6. notebook
ReplyDeleteMacroeconomy is controlled using policy instruments by government. There are two sides of policy instruments. Demand side policy instruments and Supply side policy instruments. Demand side policy instruments includes aggregate demand and supply side policy instruments includes aggregate supply. Demand side policy instruments has 3 instruments; total public expenditure, over all expenditure and rate of interest. Some of them deals with fiscal policy and some of them deals with monetary policy which is undertaken by government. Supply side policy instruments has 3 instruments; specific public expenditure, change in individual taxes and new rules and regulations. Based on the economic situation, it deals with two sides. Which is prosperity and recession. In prosperity side, Aggregate demand is much better than Aggregate supply, the contractionary fiscal and monetary policy which deals with demand and expansion fiscal and monetary policy which deals with supply. But in recession side, Aggregate supply is much better than aggregate demand.
Demand side policy instruments has 2 types of policy; Expansionary and conractionary fiscal policy. The advantagaes of expansionary fiscal policy are; it can reduce taxes and increase the government spending which affects the economy. The effect of expansionary policy in economic growth, which it may leads to the increased investment, consumption and employment. Second, it allows people to spend money on investments in the short term.Third, when government cut the taxes which affects the profit, firms and businesses will increase their output and it may lead to the fall in unemployment because a company will need many workers to produce outputs.
The disadvantages of expansionary fiscal policy are; when government increase the aggregate demand, it will increases the government spending and fall in tax. In theory, higher government spending will increase aggregate demand (AD=C+I+G+X-M) and lead to higher economic growth. Third, when the demand falls, it will lead to the close of the firms and businesses which may lead to the rise in unemployment.
The advantages of conractionary fiscal policy are; first, it may help to reduce the aggregate demand on prices which is caused by the rise of inflation. Second, it occurs when government spending is lower than tax revenue, and is usually undertaken to pay down government debt. The disadvantages of concractionary fiscal policy are; first, contractionary policy is difficult to implement because no one wants cuts in spending, such as education, defense and health. Second, If the economy is operating in full employment, so inflation may cause a problem, the government must control the economy by lowering or increasing the prices.
Supply side policy instruments deals with supply. Which it has to increase supply of goods and services. It has their own selective education; selective incentives to produce, selective intencives to consumers, selective intencives of taxes, rules and regulations, labour policy, trade barriers (imported goods), and competition. The advantages of supply side policies are; first, it include the promotion of greater competition in labour markets, by the removal of restrictive practices, for example : the protection of employment. Second, it measures to improve labour mobility will also have a positive effect on labour productivity, and the supply-side policy performance. Which may improves the labour market flexibility.
ReplyDeleteThe disadvantage of supply side policy are; first, However, supply-side policy can take a long time to work its way which deals with economy. For example, improving the quality of human capital, through education and training, is unlikely to yield quick results. The benefits of deregulation can only be seen after new firms have entered the market, and this may also take a long time. Second, supply-side policy is very costly to implement.
In conclusion, demand side policies are more affective than supply side policies because demand side policy is much more easier to be controlled by government. Because aggregate demand is affected by government.
References :
- Economics lecture
- https://answers.yahoo.com/question/index?qid=20090118003840AAcGjOP
- http://www.economicshelp.org/blog/617/economics/impact-of-expansionary-fiscal-policy/
- http://www.economicsonline.co.uk/Global_economics/Supply-side_policies.html
92% Unique content.
Celia Pricilla 8A
There are 2 policies that the government can use to reach the objective. Demand side policy and supply side policy. The demand side policy aim is to affect the aggregate demand of a country. there are 2 types of demand side policies: expansionary fiscal policies and contractionary fiscal policy . demand side include expansionary fiscal policies and monetary policies. Example if government decrease the tax of a cigarette, the people will buy more cigarettes. Automatically the demand of cigarettes of a country will increase. As people have more money to spend as less is taken away from them by the government.
ReplyDeleteSupply side policy aim is to affect aggregate supply of a country. the supply side policy aim to increase supply such as productivity and improve education because when people become educated their skill is increasing. When the skill is high they can produce more goods than other people.
The government can help to reduce unemployment by increase the government spending and lowering the tax. For example government can increase the public transportation therefore the people can work in the public transportation as a driver so the unemployment will decrease. if the taxes is low the aggregate demand of a country will increase. The government can decrease the interest rate. If the interest rate Is low, people will borrow more money and spend more. This make the aggregate demand of a country will increase. To decrease inflation the government can increase taxes so the people demand will decrease and the inflation also decrease.
The disadvantages of demand side fiscal policy are cumbersome to use. Cumbersome is difficult. The government is difficult to use demand side fiscal policy. It is difficult to know precisely when and how much to expand public spending or cut taxes by during an economic downturn. Boosting aggregate demand can cause economic to overheat and lead to high unemployment. The second is increase in public expenditure crowds out private spending. To finance an increase in public spending and / or a cut in taxation a government may need to borrow the extra money it needs from the private sector. The more money the private sector lends to a government the less it has available to spend itself. This is called crowding out. the third is increase in taxes on income and profits can reduce incentives to work and enterprise. If taxes are too high, people may reduce their work effort. This can lead to decrease in labour productivity, total outputs and profits of a business. And the labour is forced to work more. Increase in expansionary policy can create inflation. If the taxes are low and increase in public spending can increase the wages of the person can cause the cost of living is high. Rise in wage can cause increase in production and reduce the demand of a labour. This can cause inflation.
The conclusion is the demand side policy is more effective to achieve the objective. The demand side policies is more important because it can make people buy more goods and its also beneficial for the supplier
Reference :
Economics notebook
https://answers.yahoo.com/question/index?qid=20090520123613AAkSEpa
complete economics for Cambridge IGCSE and O Level swcond edition.
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Government have these 4 main objectives, which are to achieve low and stable inflation, high and stable employment, economic growth in national output, and a stable balance of international trade and payments. Policy instruments are used by government to able to control or influence the aggregate demand and supply. There are both 2 types of fiscal and monetary policy. Expansionary fiscal policy and monetary policy means of increasing the aggregate demand. While contractionary fiscal policy and monetary policy means of decreasing the aggregate demand. Expansionary fiscal policy means of cutting the tax on profits which with an incentive to increase output and investments in new productive capacity. By having expansionary fiscal policy usually means increasing a budget deficit. In contrast contractionary fiscal policy means of reducing the pressure of the prices on the economy by increasing the tax. Monetary policy involves in the change of interest rate and money supply. Expansionary monetary policy means of decreasing in the interest rate and money supply while in contrast, the contractionary monetary policy means of increasing the money supply and interest rate. Supply side policies target economic growth which is designed to boost the productive potential of an economic and increase the aggregate supply of goods and services. Supply side policy instruments are selective tax incentives, selective subsidies, improving education and training, labor market reforms, competition policy, removing trade barriers, privatization, and regulation and deregulation.
ReplyDeleteBy expansionary fiscal policy, cutting taxes on profit may motivate employees to increase production. The budget deficit is the amount a government has to spend each year relative to the amount revenue it raises from taxation. While in contractionary fiscal policy, by raising the tax, disposable income would decrease which would lead to a low inflation and it would decrease the consumer expenditure. Fiscal policy also may be used to redistribute incomes between rich and poor. For example, income taxes might be increased for higher income or for rich people and the money used to finance more public services and increase welfare for people lower incomes. In expansionary monetary policy would cut money supply and interest rate, which is usually taken when there is economic recession. As this would increase the borrowing and less saving as interest rates are decreased. Government may increase money supply be having quantitative easing. In contractionary monetary policy, interest rate and money supply are increased. This would lead to having an increase of saving and decrease of borrowing. While in supply side policy, expanding the aggregate demand would decrease the inflationary pressure on prices. In a long term, by using supply side policy all the macroeconomic objectives of government, it could all be achieve at the same time. By having selective tax incentives, they might cut the tax in earnings which would have a positive impact on the productive efforts of workers and firms. Because as cutting tax on earnings, more people would tend to find job as earnings would be obtained more. And as by having selective subsidy, it could help expand output and reduce market price. Because as subsidy is given to a business, it would make the product cheaper. This would make an increase in sales which would increase the revenue and profit. This profit may be used to have research and development in the business and would increase the output. Improving education and training could increase the efficiency of the employee. And by having competition policy, fewer firms would be too powerful in the market and prices would fall as it turns into competitive price. Regulation and deregulation means of laws given by the government. This may be use to protect key industries from unfair competition and to protect the rights of the employees.
In demand side policy, expansionary fiscal policy is usually taken when there is an economy recession. This is to increase the falling of employment and the falling of private sector demand for goods and services. There is a risk in expansionary fiscal policy that they will simply save this extra money or spend it on imported goods. And if the public expenditure exceeds total revenue the budget will be in deficit and the government would need to borrow money or have loan to finance it. And fiscal policy is cumbersome to use or in other words, fiscal policy is difficult to use. And it cause crowding effect, where government would borrow money from private sector, and money is not used efficiently. And by increasing taxes on income and profit, it may cause to a decrease in the incentives to work and enterprise. And expansionary fiscal policy may cause to inflation as disposable income rises because taxes are lowered. In Expansionary monetary policy, as money supply is increased, it may cause to inflation. As printing too much money notes may reduce the value of money. And in contractionary monetary policy, if the aggregate demand decreases, it may cause in rising unemployment and if the firm cuts the investments, it may affect the future economic growth. By increasing the aggregate demand during an economic recession, it might raise output and employment in an economy but it may boost consumer demand for import goods. Therefore, it may make the international payments less favorable. And by raising tax and interest rate and cutting public expenditure to reduce inflation by lowering total demand may result in lower output and it might cause to more unemployment.
ReplyDeleteSo, as demand side policies may solve some economic problems, it may affect to another problem and it could only be solved in a short term. For example, as inflationary prices are high, government would increase tax and the disposable income would decrease, causing the inflation rates to decrease. But this may make less unemployment and increase poverty, because incomes and profits are cut by high tax. While supply side policy, can help to achieve all the macroeconomic objectives of government at the same time in a long run. This means that it would not create or affect another problem. This makes supply side policy more effective to use in contrast in using demand side policy.
Reference: Economic book
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Brian.A
8A
First,there are four macroeconomic objectives which are: low and stable inflation in general level of prices, high and stable employment to create low level of unemployment, high and sustainable economic growth in total output and increase in standard of living, for example: GDP and lastly,stabilization of international trade-balance of payment.The government made policy instruments to achieve these objectives. Policy instruments are tools which can be used to overcome problems and achieve objectives, it is divided into two basic type of policy instruments, they are demand side policy instrument and supply side policy instrument.Demand side involved total public expenditure, overall expenditure and rate interest while supply side involved specific public expenditure such as government provide subsidies to firm to encourage them funding R&D so production process and product is more efficient, change in individual taxes and new rules and regulations.Demand side includes aggregate demand, which is the sum of C + I + G(X-M) where C is household cost, I is investment, G is government and M is import,it is made by Keynesian Economics and supply side includes aggregate supply, grouped in the Classical Economics.Classical Economics are more into supply creates its own demand, invisible hand, leissaz faire and flexibility.Demand side policy is usually more effective to obtain the objectives compare to supply side policy but both bring advantages and disadvantages to the economy.
ReplyDeleteDemand side policy instrument consists of fiscal policy and monetary policy. Fiscal policy involves the measure of public revenue, public expenditure and public debt and borrowing, it is always controlled by government and is separated into two sections: expansionary and contractionary fiscal policy.Monetary policy is controlled by central bank and measures the interest rate, bank rate, CRR and SRR. Expansionary fiscal policy usually means increasing a budget deficit, the advantages firstly is multiplier effect, this means when government spends money, the receiver may save or spend for consumption on goods and services, depending on the person’s disposable income.Second, it includes investment, it helps to increase the investment while if investment increase, it leads to more jobs, for example: the construction of building provides more workforce, this gives benefit to the worker so they may learn more skills and be in job demand in the future, lastly, when it involves cutting taxes, profit and disposable income of the firm will rise along with the participation and motivation of employees to increase production and produce more total output . However, it could cause rise in inflation and more interest rate.In a period of falling revenue, it can cause to deficit spending and may crowd the private sector investment.Government used this policy during the fall in economy,recession and unemployment is rising.While in other hand, contractionary fiscal policy aims to reduce pressure on prices by cutting aggregate demand through increasing taxation and reduction in public expenditures by cutting wages and raising direct and indirect taxes.But the disadvantage includes reduce in employment and growth in output which is dangerous because unemployment will cause higher level of crime, decrease in productivity and increase in poverty.
Supply side policy instrument effect to the aggregate supply, the benefit of using supply side policy to achieve macroeconomic objectives firstly it lowers the inflation, when inflation is low, the value of money increases, the purchasing power of money will hold and be stabilized causing the country to be more developed.Then, it helps lower down the unemployment, when unemployment is reduced, crime rate decrease along with poverty and disposable income rises. Economic growth also improve because of increasing in aggegrate supply.Lastly, improvement of trade and balanced payment by making firms more productive and competitive, they will be able to export more.But aside from the advantages, it also bring some effects to the economic.It requires more costs, such as, for example: training or educating the workers to increase productivity so profit may be reduced.
ReplyDeleteIn conclusion from above, sometimes supply side policy is more effective in comparison of demand side policy because by using supply side, it helps to accomplish low and stable inflation, providing employment to people, high and sustainable economic growth and increase international trade and balance of payment although more people prefer demand side policy, but it will be more effective way is to use both policies in suitable and correct condition.
References:
1. http://www.konsult.leeds.ac.uk/public/level1/sec09/
2. http://www.ehow.com/info_8640328_advantages-expansionary-fiscal-policy.html
3. http://www.economicshelp.org/macroeconomics/economic-growth/supply-side-policies/
4. https://answers.yahoo.com/question/index?qid=20130201155702AAgxRLm
5. Complete Economics for Cambridge IGCSE and O level, Second Edition, Dan Moynihan and Brian Titley, Unit 5.1, section 2 and 3, pg. 279-288
6. http://www.investopedia.com/terms/a/aggregatedemand.asp
Felicia Angeline 8A
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To achieve government’s macro-economic objectives, the government will use policy instruments which are fiscal and monetary policy. Both are included in demand-side policies. Demand-side policies influence the level of aggregate demand in an economy by using a number of different policy instruments, which are the total public expenditure, overall level of taxation, and rate of interest. On the other hand, supply-side policies aim to boost the aggregate supply of goods and services in an economy, which will help to raise the rate of economic growth and employment, increase the supply of exports and reduce inflationary pressures because more goods and services will be available to satisfy aggregate demand.
ReplyDeleteIn demand-side policies, there are fiscal policy, monetary policy, and laws. Fiscal policy deals with taxation, and monetary policy deals with money and bank. Expansionary fiscal policy is used when the government wants to increase the total demand to make higher employment and output by increase its expenditure and reduce taxation. Contractionary fiscal policy is when the government wants to reduce pressure on prices in the economy by cutting the total demand through a reduction in public spending and increase the tax. Expansionary monetary policy is when the government cut the interest rates to boost aggregate demand.
In supply-side policies, there are policy instruments such as selective tax incentives, selective subsidies, improving education and training, labour market reforms, competition policy, removing trade barriers, privatization, and regulation and deregulation. In selective tax incentives, cutting taxes on earnings and profits can have a positive impact on the productive efforts of workers and firms. In selective subsidies, subsidies can be used to expand output and reduce market price. In improving education and training policy instrument, they need a highly skilled worker in order to be successful when competing in international markets. And so on…
In controlling the country, government uses the demand-side policies more than the supply-side policies. It is because demand-side policies are very effective to achieve the macro-economics’ objectives of the government. The reasons of the demand-side policy instrument to be effective are because the amount consumers have to spend on goods and services depends on their level of disposable income after taxes have been deducted. Second, it is because taxes on profits will affect the amount of money firms have to invest in new productive capacity and their demand for labour. Third, increasing public expenditure can boost total demand and stimulate higher output and employment in an economy. And last but not least, the fourth reason is because as interest rates rise consumers may save more and borrows less to spend on consumer goods and services, this may also encourage investments from overseas, as interest rates fall firms may borrow more to invest.
ReplyDeleteIn schools of economic thought, which consist of aggregate supply which is classical economist, and aggregate demand which is Keynesian economic from 1993. When there is an automatic equilibrium, supply creates its own demand, invisible hand, wage flexibility, and laissez fairre. In the Keynesian economic which is from 1993 there is a formula which is government, when the aggregate or total demand rises, it is C+I+G+(x-m).
Although demand-side policies are more effective than supply-side policies, there are some problems for the demand-side policies, which is more focused to the fiscal policy, which is a part of demand-side policies. Which are firstly, fiscal policy is cumbersome to use, which means it is hard for the government to know when and by how much to expand public spending or cut taxes during an economic downturn. Second, increases in public expenditure crowds out private spending. To finance an increase in public expenditure and reduce tax a government may need to borrow more money from the private sector. This is called crowding out. Third problem of the fiscal policy is that increase the tax on incomes and profits can reduce incentives to work and enterprise. If taxes are too high, people and firms may reduce their work effort. Fourth problem is that an expansionary fiscal policy creates expectations of inflation, which means consumers and producers in an economy may come to expect a future rise in inflation following an expansionary fiscal policy.
So, in conclusion of what I have discussed in the previous paragraph, it is true that demand-side policy is more effective than the supply-side policy because of many reasons that I have discussed in the previous paragraph.
References :
1. Complete Economic for Cambridge IGCSE & O Level , Second Edition by Dan Moynihan and Brian Titley
2. Economic notebook
Originality : 90%
Audrey Tan, 8A
The debate between the effectiveness of demand side policy and supply side essentially lies in the economic views of a person. Classical economists support supply side policies, while Keynesian economists support demand side policies in terms of effectiveness to alter a market and achieve macroeconomic objectives. Classical economics is named so because it is among one of the first theories to be set out, rooting from around the 18th century, and is mainly based on European models. Keynesian economics is a fairly new theory first mentioned by J.M. Keynes, a British scholar. It first took hold in the 1930s, and took on a more global view, and generally took a standpoint saying that a free market won’t always build a stable economy.
ReplyDeleteClassical economics come in or shortly after the age of industrialization. A large increase of goods produced was present at the time, so the economy was stimulated. Classical economists believe that in a market, government should have no interference – a strictly “hands-off” role is believed to be most effective. This government style is referred to as a laissez-faire government. A free market is encouraged, and technically, this means that private sectors have the right to determine fiscal control and interest rates, and the society should be able to decide for themselves what is acceptable, what is oppressive, and how the policy should be run in a broad sense. Government intervention would only be a detriment to the economy. Classical economists suggest that the market will automatically adjust to booms and busts, and Adam Smith suggested that a metaphorical ‘invisible hand’ would automatically move a market into a natural equilibrium, without any outer intervention needed. Jean-Baptiste Say created a law, which later, would be named Say’s Law, that supply creates its own demand. This means that when aggregate production is increased, all the factors of production participating in the production process receive income (in the form of rent, wages, interest and profits) which is sufficient to purchase the generated output. The additional income is equal to the additional output.
Supply side policies are argued to be more effective if any government involvement is brought about, assuming that supply equals to demand. A method of supply side policy concerning the labour market is to increase productivity of factors of production. This can be done in several ways, such as by controlling the tax system. To increase production and output, government can reduce direct tax rates such as income tax and corporation tax. Lower income tax means that more of a person’s income paid by the company they are employed in to actually be received by the worker, and less of it to be paid as tax. This will create a larger incentive for employees to work harder and the unemployed to seek work. Lower corporation tax will encourage multinationals to invest its operations in a country and entrepreneurs to start up new businesses, both which will increase employment. The government may also spend directly, or provide incentives to private sector, to provide better training and education for workers, which will increase their work productivity and improve their skills. Government can set standards of minimum education, and force schools to include some skills and information to be compulsory in their curriculum. Government can increase competition in labour market by reducing restrictive practices and labour market rigidity, such as employment protection.
A method of supply side policy concerning the product market is to increase the performance of firms, such as providing grants or decreasing taxes on firms to encourage them to innovate and use new technology. This way, government will encourage them to perform better. Deregulation or liberalization of product markets to bring down barriers of entry will encourage new and dynamic firms to enter the market. Therefore it will also improve supply-side performance, resulting in higher efficiency and a more competitive market. This is called competition policy. Government will encourage entrepreneurship, because successful entrepreneur can create innovation which has positive spillover effects on other industries. This can be done by giving advice to entrepreneurs, loan guarantees for new firms, and regional policy assistance to firms in poor areas.
ReplyDeleteSupply side policies have many advantages; Firstly, it helps reduce inflationary pressure, due to increased productivity, efficiency in the labour and product markets. Secondly, it creates real jobs and sustainable growth due to their positive effect on labour productivity and competitiveness. An increase in competition helps improve the balance of payments. Therefore supply side policies also produce less conflicts with other objectives such as low inflation, stable employment, sustainable growth and balance of payments.
Keynesian economics, however, is rooted in the Great Depression of the 1930s. It proved that markets do not automatically fix themselves, that equilibrium is not always achieved, and that a surplus of production is possible. Supply does not always create its own demand. The market is imperfect and not self-sustaining. It showed that classical economics failed to create an effective market. JM Keynes then introduced a concept that government should be involved in the market. Keynesian economists believe that demand is majorly influenced by government decisions. Keynesians argue that private sector decisions may lead to inefficient macroeconomic outcomes and must be intervened by the public sector, in particular, fiscal policies by the government and monetary policies by the central bank in order to stabilize output in the business cycle. Keynesians advise for a mixed economy – where private sector is still predominant, but with government intervention in recession to prevent depressions. Keynes brought into perspective the problem of structural deficiencies such as unemployment: it is not caused by laziness, but rather from imbalances of demand and whether the economy is contracting or expanding. Keynes argued that because it is not certain that all the goods individuals produce will be demanded, so unemployment is a natural consequence of a contracting economy. Unemployed people would not be able to purchase goods and services produced.
Keynesians argue that demand side policy is more effective in controlling a country’s economy, because aggregate demand will determine aggregate supply. Supply and demand is not able to adjust themselves into equilibrium, therefore government intervention is needed. Aggregate demand can be calculated by the formula C+I+G+(X-M), or the sum of consumer spending, investment, government spending and net exports. Affecting any one of these factors will alternate the demand of goods and services. Demand side policies consist of fiscal and monetary policy, which is used together to control the economy. A country may face two macroeconomic situations: prosperity and recession. Prosperity is a stage of the economic cycle in which conditions of high employments, high exports and high income is present. This will lead to higher purchasing power if inflation rate is kept low, however the case is that usually fairly high, but controlled, inflation is present so there is less real increase in income. Recession is the opposite stage in an economic cycle in which condition of high unemployment, low exports and deflation is present.
In a prosperous situation, government would more likely use contractionary policy to reduce inflationary pressures while government will use expansionary policy in a recession to boost aggregate demand. Both policies include fiscal and monetary policy instruments – fiscal policies are determined by the government while monetary policies are determined by the central bank. Prosperity must be controlled or the economy would fall into inflation: prices will rise and the value of money will fall. Therefore a contractionary fiscal policy aims to reduce pricing pressures by cutting aggregate demand through a cut in consumer spending and government spending, both which are factors of aggregate demand. Consumer spending is reduced by raising total taxation. As an example, the wages of a public sector worker may be cut and a raise in income tax will reduce his total disposable income, therefore reducing demand for goods and services. The central bank can also take charge by taking out money from the market by savings (leakage) to prevent its value from falling further, because a lower supply would mean a higher value. Therefore it will raise interest rates and cut money supply. High interest rates will encourage people to save more because they will earn more returns, while people are less inclined to borrow because it is more expensive to do so. Cutting the money supply can be done by the central bank selling government bonds to commercial banks. When banks purchase these bonds, they will have less money to lend to debtors. Reducing the money supply would definitely limit the amount of goods and services a consumer can buy.
ReplyDeleteIn a recession, government would apply expansionary fiscal policy, which increases aggregate demand to boost employment and output. It can do this by increasing government spending and cutting taxes. Tax reduction on corporate tax will give an incentive to firms to produce more output and invest in new machinery and technology. Cutting taxes on income tax will encourage more people to join the workforce, therefore increasing their disposable income and purchasing power. So, they will be able to purchase more goods and services. The central bank will apply expansionary monetary policy, which involves a cut in interest rates and/or expansion in the money supply to boost aggregate demand. With lower interest rates, people are able to borrow with a cheaper price. Therefore, reducing interest rates will increase consumer expenditure and encourage consumers to buy more goods and services. It will also increase investment by firms. Government can increase the money supply by simply printing more notes and coins or quantitative easing, which involves the government trading newly printed notes with financial assets held by banks, such as government and corporate bonds. Increasing the money supply would allow people to spend more on goods and services.
Demand-side policies are beneficial because they are adjustable to the economic situation, whether an inflation or recession. Demand-side policies will not also create surpluses of goods because they are suited to the needs of the economy, rather than supply side policy which do not take into consideration the demand of a product.
In conclusion, demand side policy is more efficient than supply side policy because demand side policy is able to suit itself to economical conditions, rather than supply side policy which is only able to increase supply.
References:
http://www.slideshare.net/kmadeiras/classical-vs-keynesian-economics-presentation
http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
http://en.wikipedia.org/wiki/Keynesian_economics
https://answers.yahoo.com/question/index?qid=20090501101643AA0w7sF
http://www.economicsonline.co.uk/Global_economics/Supply-side_policies.html
Complete Economics for Cambridge IGCSE & O Level - Dan Moynihan, Brian Titley
Originality 99%
ReplyDeleteMacroeconomics is about dealing with structure, behavior, decision making and performance of an economy as a whole, not as individual markets.
ReplyDeleteDemand side policy instrument can be effective for some reasons. First, value that consumers have to spend on services and goods depend on the level of their disposable income after income taxes have been reduced. Second, taxes on profit will influence the value of money firms have to invest in demand for labor and new productive capacity. Third, can make higher output and employment in economy because the increasing of public expenditure can increase the total demand rapidly. Fourth, people will save more and borrow less to spend on their goods and services as interest rate is increasing. And also, it can recommend investments from other countries, because as interest rate fall firms will borrow more to invest. Demand side policies include fiscal and monetary policy. Fiscal policy is effective because some reasons. First is expansionary fiscal policy. It can increase expenditure and reduce taxation because government increases aggregate demand in economy to increase employment and output rapidly. Second is contractionary fiscal policy, where it helps to decrease pressure on prices in the economy. It’s by cutting aggregate demand through decreasing of public expenditure and increasing total taxation. Monetary policy is effective because expansionary monetary policy where it involves cut in interest rate and expansion in money supply to increase aggregate demand rapidly. There are some problems might be faced. First, it’s hard for government to know when and by how much to expand public spending during economic downturn. Boosting aggregate demand by increasing public spending and cutting taxes may cause economy to overheat, where the general level of prices will rise if aggregate demand expands faster than the aggregate supply of goods and services. Also, the increasing in public expenditure crowds out private spending.
On another hand, supply side policies have its advantages. First, it can help reduce the inflationary pressure in long term because of efficiency and productivity increase in the product and labor markets. Second, it can help create real jobs and sustainable growth by their positive effect on labor productivity and competitiveness. And the increases in competitiveness will also help improve the balance of payments. Third, it is a low possibility to create conflicts between the main objectives of price that constant, sustainable growth, employment that run well and a balance of payments. This explains the supply-side policies’ popularity over the last 25 years. They also have disadvantages. First,
supply-side policy can take a long period of time to do its way through the economy. Second, it is very costly to implement. Third, some detail types of supply-side policy may be strongly resisted as they may decrease the power of various interest groups. For example, in product markets, profits may suffer as a result of competition policy, and in labour markets the interests of trade unions may be threated by labour market reforms. Fourth, there is the equity issue. Many supply-side measures have a negative effect on the distribution of income, at least in the short-term.
On conclusion, demand side policy instruments are not always more effective in achieving the macroeconomic objectives than supply side policy instruments. There are some points or statements where it’s proving that there are ineffectiveness happened.
references:
http://www.economicsonline.co.uk/Global_economics/Supply-side_policies.html
http://en.wikipedia.org/wiki/Macroeconomics
Complete Economics for IGCSE and O Level Second Edition by Dan Moynihan and Brian Titley page 280, 282, 284-287
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The school of economics has 2 theories,Classical and Keynesian, Classical believed that supply creates its own demand, so there's no need to create a demand,you just need to create asupply and it will create its own demand.Also believes in the laissez faire concept, which means that the market needs no government intervention. Keynesian economic theory relies on spending and aggregate demand to define the economic marketplace. Keynesians believed that aggregate demand is often influenced by public/private decisions.Both theories favors different policies.Keynesian favored the Demand-side policy and classical favored the supply-side policy. Both has its own pros and cons.
ReplyDeleteI think that people have their own thoughts on this matter and until now both sides are favored equally.I think that after the failure of the classical theory in the great recession, I will favor using demand-side policies because it can prove to be more efficient in achieving government's general objectives. Supply-side policies tend to give certain incentives to people, that could be dangerous because it can cause problems in the society, the people might think that it's not fair, they are not treated equally. If the government decides to add rules and regulations, it might cause some more problems, people won't easily agree with the new rule, if it won't favor them then they would certainly oppose the government.It could take some important time to deal with the crowds and in some occasions they would need to cancel the new rule in order to maintain peace. If they try to add trade barriers to imported goods, it would just encourage MNCs to leave the country and find another country that could benefit them more, if MNCs leave then where would most of their taxes come from. Also some supply-side policies increases direct taxes in order to decrease AD in a situation where a country is facing prosperity.Most workers will have disincentives to work, they feel that all their time working isn't worth anymore because most of their salary is given to the government in form of taxes.Also if they will increase taxes, crowding out effect would happen,because most of the time the private sector is the sector that handles money efficiently while the government is considered to be inefficient when handling money.If more money would be transferred from the private hands to the public hand, more money would be used inefficiently.Some methods that the supply-side policy uses could also result in an increase in inflation.While the demand-side policy, which concerns more on dealing with AD, would be more efficient because i believe that supply can't create its own demand so i decided to stick with the keynesians and their theory. You can also do a lot of things using the demand-side policy. Because it can directly control the total public and overall expenditure of a country as well as its rates of interest. By using these kinds of methods, it would cause less problems in the society because everyone is affected equally. Well maybe rates of interest could be used to benefit the central bank but because politicians aren't running the central bank, that wouldn't happen unless the whole country is corrupt. For all these reasons above, proving that using supply-side policy could be inefficient, i favor using demand-side policies.Another important thing is that the country could lose some smart humans.If they charge the rich more taxes, it would just encourage them to go to another country, and generally the rich is the most efficient, it wouldn't be nice to lose those kind of people.
But sometimes there are some rare cases where using supply-side policies could benefit the government more.If there's severe inflation and the country is facing a great recession, the people won't mind the government creating new rules and regulations, they would not oppose.Also actually there's nothing the rich could do if the government would charge them more tax. They would lose their images in the public if they were to oppose and if they even tried to oppose they would lose to the government because a lot of poor people are siding with them and in this world we know that majority always wins.Giving incentives could be a good thing.It could give a boost in something that's truly needed for example AS, and it wouldn't effect other things.Because the government is only giving incentives to certain people.Also i think that disincentives to work could be a good thing, if workers are discouraged to work, they would request to work less hours, and for a company to run, it would need the workers to work for a long time.But because they won't work for that needed time then companies would be forced to employ more workers, this could reduce unemployment.
ReplyDeleteThe conclusion is that, each people can have different opinions on this matter, some would favor using demand-side policies, some thinks that supply-side policy is better than demand-side policy,and I think that it would be more efficient to use demand-side policy.
Jovan Pan 8A
Reference:
Economic Notebook
Originality:
93%