Grade 8B IGCSE
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- 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
Is demand side policy instruments always more effective on achieving the macroeconomics objective than the supply side instruments , main macroeconomics objective of a country is always first low and stable inflation second high and stable employment third high and sustainable economic growth and fourth is balance of payment and there are other two which is inequality and sustainable development if government could maintain this problems their country will do good thats why government try really hard to maintain this problems
ReplyDeleteInflation is general and sustainable use in price level in a specific time period this is very important for government to keep the price level low and sustainable because if its to high the purchasing power of country money will decreased and all price will increases making recession unemployment any many more
While unemployment is the condition where workers are willing to work with any possible wages but unable to get that job and this could create many problems such as it could decrease country average income , increase in poverty of that country ,increase crime rates of the country and decreased standard of living thats why government try to sustain it
Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP. Of more importance is the growth of the ratio of GDP to population (GDP per capita), which is also called per capita income. An increase in per capita income is referred to as intensive growth.
Growth is usually calculated in real terms inflation-adjusted terms – to eliminate the distorting effect of inflation on the price of goods
International trade is the trade of good and services with the rest of the world and this could benefit the country because they can earn money from other country too from export and get other country advance goods from imports
Government could obtain this objectives from policy instruments and there are two policy instrument demand side policy instrument and supply side policy instrument government could maintain this by supply side policy instruments by giving rules and regulation such as in Indonesia people must use batik every friday this can increase the money for batik makers in Indonesia so people will instead by batik than other high class clothes second is by giving subsidies to consumers this also can encourage consumer to buy Indonesia product which are subsidized also they could give education and labour market so employment will increase because they can became more skilled so easier to find job and labour market also can help them also by giving incentive to producers and also capital money this could increase employment if the country and national trade so country economic also will increase
ReplyDeleteWhile the demand side policy is also divided into to fiscal and monetary policy
Monetary is usually to control supply of money so government will check if the county is in prosperity or recession if in prosperity they will increase interest rate so more people will save and less people will borrow and less people will purchase stuffs
But if the country is having recession they government will decrease interest rate so people will save less and buy more And this two is mostly used to promote economic growth and stability.The official goals usually include relatively stable prices and low unemployment
fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand and the level of economic activity.The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables in an economy:
Aggregate demand and the level of economic activity;
The distribution of income;
The pattern of resource allocation within the government sector and relative to the private sector.
But fiscal and monetary policies also have disadvantages such as
1.difficult to use
2.the crowding out effect
3.increase in taxes
So my conclusion is that yes supply side is definitely better for government to reach macroeconomics objective because in demand side there are disadvantages that could also create problems such as difficult to use , the crowding effect and the increase in taxes and this also could burden governmental and people
Reference
Cornell notebook
Originality :
90%
The macroeconomic objectives are low and stable inflation, high and stable employment, high and sustainable economic growth and stable Balance of payments. To achieve these objectives it is better to use demand side policy instruments rather than supply side policy instruments because it is more effective. Demand side policy instruments are fiscal and monetary policies. Fiscal policy involves public revenue, public expenditure, and borrowing and debt services. Fiscal policy is the means by which a government adjusts its spending levels and tax rates in order to monitor and influence a nation’s economy. Inflation is caused by too much aggregate demand and rising costs. Unemployment is caused by lack of demand for goods and services. Expansionary fiscal policy means if a government wants to increase aggregate demand in the economy to boost employment and output it can increase its expenditure or reduce taxation. Cutting taxes on personal income may encourage more people to participate in the workforce and motivate employees to increase their productivity. It will increase the amount of disposable income people have to spend. Expansionary fiscal policy can end the unemployment problem. Government will often implement an expansionary fiscal policy during an economic downturn or recession, when private sector demand for goods and services is low and falling and unemployment in the economy is high and rising. Fiscal policy instruments can also affect the distribution of income. Contractionary fiscal policy aims to reduce pressure on price in the economy by cutting aggregate demand through reduction in public expenditure or rising taxation. Contractionary fiscal policy can solve inflation.
ReplyDeleteMonetary policy involves changes in the money supply or interest rate to influence the level of aggregate demand and economic activity. It is also used by governments to influence the exchange rate of it’s national currency against other foreign currencies and in so doing, to affect the level of international trade and transaction. So balance of payments and economic growth can be balanced by monetary policy. Supply side policy instruments are designed to boost productive potential of an economy and increase its aggregate supply of goods and services. Expanding aggregate supply will help to reduce inflationary pressure, provide additional employment opportunities, and boost the production of goods for export. Over the long run, supply side policy can help achieve all the macroeconomic objectives of government at the same time.
Supply side policy instruments include the following:
1. Incentives to producers
2. Subsidies to consumers
3. Rules and regulations
4. Labour market
5. Education
6. PSE
7. Privatisation
Demand side policies are the rules that are made by the government to help solve the economic problems in a short period of time, So that the impact of this policy will only affect the economy in a short time. An example is the national currency is too low compared to other foreign currencies the government will be able to do revaluation and the opposite if the currency is too high compared to other foreign currencies. If inflation is too high the government can increase the interest rates. Supply side policies can achieve the macroeconomic objectives if they do it in a long period of time, Because supply side policy instruments are used to influence the behaviors of different groups of consumers and producers. If an economic problem suddenly appears the supply side policy cannot help much because to influence the behavior of consumers and producers cannot be done in a short period of time.
ReplyDeleteEven though demand side policy instruments are more effective than supply side policy instruments it also has some problems. The fiscal policy has 3 problems and they are difficult to use, it causes the crowding out effect, and increased taxes will decrease total productivity. The crowding out effect is an economic concept where increased public sector spending replaces or drives down private sector spending. Crowding out refers to when government must finance its spending with taxes or deficit spending leaving businesses with less money and crowding them out. The monetary policy also has a problem when used. Even though monetary authorities can react quickly to fluctuations in an economy, it takes a while for changes in the money supply to actually influence prices and unemployment. By the time the policy has affected the economy, There may be no more need for it to have occurred.
So in conclusion the demand side policy instruments are more effective than supply side policy instruments to achieve government objectives and solve economic problems in a country. For problems that have to be solved in a short period of time it is better to use demand side policy instruments and for a long period of time it is better to use the supply side policy instruments.
references:
http://www.investopedia.com/articles/04/051904.asp
http://www.investopedia.com/terms/c/crowdingouteffect.asp
http://www.unc.edu/depts/europe/euroeconomics/Monetary%20Policy%20General%20Problems.php
notebook
economics book
93% original
The government has 4 main objectives. They are
ReplyDelete1. Low and stable inflation rate
2. High and stable employment rate
3. High and sustainable economic growth
4. Stable Balance of Payment (BOP) in the international trade
In order to achieve this, the government will apply policies in the economy. There are two types of government policies. They are Demand Side Policies and Supply Side Policies, the difference is that Demand side policies affects the Aggregate Demand of the economy and Supply side policies affect the supply of a certain product. There are two types of Demand side policies which are Fiscal policies and Monetary policies. Fiscal policies changes the taxation level and public expenditure level while monetary policies changes the money supply in the economy of the country which is controlled by the Central Bank.
Demand side policies are definitely effective in helping the government achieve the 4 main objectives. As they are easier to fully implement, because all the methods does involve the government. Monetary policies relies on the Central Bank which is controlled by the government. While Fiscal policies relies on the changes of the taxation rate or the level of public expenditure done by the government and only the government.
How effective is a demand side policy?
One demand side policy is public expenditure. Which is the government spending funds gathered by taxes on things that will benefit the country. For example if the government decided to build more oil refineries in the country, the effects of it can multiply because of the economic activities involved. Building an oil refinery will increase jobs, because it needs employees at the refineries, employees at the logistics side, employees at the research area and more.
This is because Aggregate Demand is the total of Consumption, Investment by the firms, government expenditure, and the import and export.
Monetary policies can also work. One of the main tools of the central bank (which is a part of the Monetary policy) are the interest rate and money supply.
An increase in money supply or decrease interest rate will increase the overall aggregate Demand of the economy. This can be useful to regulate an economy that is currently having a large level of unemployment. Because an increase in the money supply, will increase people’s spending ability level. This means increase Aggregate Demand, which means firms need more resources to produce their products. This means the firms will hire more people which helps to reduce the unemployment rate.
Demand side policies cannot do everything, there are problems in Demand side policies.
One of which is the fact that demand side policies are very “Cumbersome” to use. Which means that there is no way for the government to exactly know how much expenditure is needed in the country. As cutting too much or giving too much tax can be a problem in a long term.
ReplyDeleteThe other would be that, an increase in Aggregate Demand can increase the inflation rate in a long term. And that can go against one of the four main objectives of the government. A different approach, which means decreasing the Aggregate demand can result a major reduction in employment rate and also can cause a reduction in economic growth level.
In cases where Demand side policies fail to be an effective method, there will be Supply side policies to replace them.
Selective tax incentives is a part of Supply side policies. And it works by increasing or reducing the taxes of production. A decrease in taxes when producing a product will mean the firms will have an increased ability to produce. As production rate increases, firms need more workers which means they will hire more workers, therefor increase the level of employment. And an increase in productivity means that firms will invest more, thus in a long run increases the economic growth rate.
Improving the education rate of the country can work as a Supply side policy. A higher education rate of the country, means an overall increase in employment. As more people on average will have the ability to fulfill job requirements. And people are going to be more productive overall, which means people are going to do economic activities better, which in a long term increases the economic growth rate.
Selective subsidies work to. A subsidy is any form of financial assistance by the government. In the firm’s side this means lower overall production cost. Which will result in an increase in employment rate and firm productivity.
In conclusion, though demand side policies are effective, that doesn’t mean they can fully replace supply side policies as they have advantages of their own.
References:
Book
https://answers.yahoo.com/question/index?qid=20090520123613AAkSEpa
http://en.wikipedia.org/wiki/Demand-side
http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
Content originality is 96%
Well as you know first, there are 4 macroeconomic objectives. First is low and stable inflation, high and stable employment, high and sustainable economic growth and sustainable and manageable BOP (balance of payment).
ReplyDeleteDemand side policy instruments deal with aggregate demand, aggregate demand is the total demand of the final goods and services at a given time and price. The one that deal with this or the demand side policy instruments are called Keynesian economist, they start up at 1929 – 1933. The formula of the aggregate demand is C + I + G + ( X – M ), which is C is a household consumption, I is firm investments, G is government expenditure like public expenditure, X is export and M is import. If the C increases, the aggregate demand will also increases, if the I increases the aggregate demand will also increases, but if we increase our saving it will not affect aggregate demand, and if we buy example the things that are not origin in our own country, like if we eat kfc means the import increases so it will not increase the aggregate demand.
Demand side policy instrument is divided into two policy, first fiscal policy and second monetary policy. Fiscal policy include first public revenue. Public revenue include first tax, such as direct taxes which is paid directly on income such as income tax, house tax, property tax, corporation tax, gift tax and etc, and indirect taxes such as service tax, VAT (value added tax), sales tax, etc. well yes it could be more effective by using this demand side policy of instruments because by increasing the tax the rich people that usually got more income they will pay more tax, so that they will reduce buying goods and services, and the one that have lower income will pay less tax. The money that they take as tax will go to the government which is will be used for public goods such as better quality of roads, etc.
Second is public expenditure which is the public expense is greater than the public revenue so the government must to borrow. Public expenditure include capital investment, new investment, developing infrastructure, current expenditure which is day to day expense, public goods, merit goods, and defense. It also can make the demand side policy more effective because example the merit goods it can provide free education for the lower level of people so that their children can study until university and so they can get a good work in the future which can result in controlling the unemployment and also it can make the economic growth become good.
Third is borrowing or debt services. Borrowing is divided into two, first is domestic which is for household and financial institution, and second, international that include borrowing from another country such as IBRD (international bank of reconstruction and development) – WB and IMF( international monetary funds).
Now are monetary policy this include central bank, BI (bank Indonesia), RBI (reserve bank of India) and federal reserve in the USA. Monetary policy is the process by which the monetary authority in the country controls the supply of the money, the interest rate, the purpose of economic growth and stability. Which the stability can control the balance of payment in the country and make sure that the import is not greater than the export.
But not always that the demand side policy instruments are more effective than supply side policy instruments. Well first based on the economic thought of the school of thought. Supply side policy instruments is known as classical economist it deal with the aggregate supply. JB says that the supply creates its own demand.
ReplyDeleteSupply side policy instrument use the expansionary fiscal and monetary. Supply side policy instruments include incentives to producers but it is selective, subsidies to consumers but it is selective, rules and regulations, labour market, education or training, PSE (public sector enterprises).
So the conclusion of all is the demand side policy instruments can be more effectives than the supply side policy instruments. Why? Because the demand side policy instruments have public revenue which include the direct taxes and the indirect taxes. Which is when the rich people that usually got the high income will pay more taxes and therefore they will think reduce to buy goods and things, while the lower level of people will only less pay taxes which overall it can help to control the inflation that means lower and stable inflation. They also have public expenditure like merit goods and so they can give free education to the lower level of people so that they can study until university and gain good work in the future which it can reduce the number of unemployment.
References:
- Notebook
- Textbook
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- Shelvina Gabriela 8B -
Macroeconomic objectives will include high and stable inflation , high and stable employment , high and sustainable economic growth and a stable BoP .This policy instruments will help the government in achieving those objectives . Policy instruments will consist of demand side policy and supply side policy . demand side and supply side policy will consist of expansionary and contractionary policy. The demand side policy instruments are always more effective in achieving macroeconomic objectives than supply side policy . But sometimes , supply side policy can also help gov’t in achieving those objectives.
ReplyDeleteSo , I agree that the demand side policy instrument are always more effective in achieving macroeconomic objectives than supply side policy. This is because demand side policy can bring some advantages to government in achieving those objectives. The demand side policies can do several things that can help the government in achieving those objectives which are First the demand side policy can help to stabilize and make the inflation remain low. They can have the contractionary fiscal policy. By having this they will reduce the aggregate demand so that people will buy less and keep the inflation stable. They can give some high taxes for this and make people will decrease their expenditure and make the inflation stable. Second , they can help stabilize and make the employment higher. They can have the expansionary fiscal policy. By having this they can increase the aggregate demand in the economy to boost employment . The government can reduce taxation and increase its expenditure in order to increase the aggregate demand . They can reduce the tax for the products inside the country and make the outside product have a high taxes. By doing this people can buy more inside country products and increase the demand . If the demand is high , of course the company will need more employee. the government also can cut the taxes on profit . cutting taxes on profits may provide firms with an incentives to increase out and investment in new productive capacity. This can require more new employee. The example of cutting taxes is like In Indonesia , the price of movie ticket domestic and international is different . government is reducing taxes for domestic movies so that people want to watch it and charge higher taxes in international movies so that less people will watch it. This can increase the aggregate demand of the country it self , and make the employment raising . Third , they can help to make the economic growth sustainable and high. They can have the expansionary fiscal policy . Government can increase aggregate demand by reducing taxes . they can reduce taxes , so that more people want to buy more. If there is more people want to buy , they can have a higher production and make higher economic growth . the government can reduce taxes for the inside country products and make people want to buy more. Like in Indonesia , they are reducing taxes and give subsidies for the local gasoline ( Pertamina) and charge higher taxes for the outside country gasoline brand like shell , total ,etc. Fourth they can help to stabilize the BoP .They can have the contractionary fiscal policy . they need to cut the aggregate demand . they can charge higher taxes for the imported goods , so that people wont buy it and reduce the imports. By reducing imports , this can help to stabilize and even make a positive BoP
But sometimes , supply side policy can also help government in achieving their objectives. Supply side policies can , First , they also can help the government to have a high and sustainable economic growth. They can have expansionary fiscal policy in supply side. But this is actually will also be helped by the demand side policy . demand side policy will help to increase the demand , and supply side policy can increase the supply of the country so that the production can be high and make the economic growth stable. Second , sometimes government can also make the prices become so low .they can cause a deflation . so , what the government do here is that they will need to boost the supply. They will have the expansionary fiscal policy .the government will stop charging taxes and let people buy goods. But , in order for people to buy goods , the government must make the supply higher , so that people can buy more. By doing this , the inflation can be stable . not really low , but also not really high. Using fiscal and monetary policy will also c create some problems . which are first , cumbersome to use . second , crowding out effect . third , government usually charge higher taxes. Higher taxes will cause some people have a low motivation to work and cause low total productivity .
ReplyDeleteSo in conclusion , its true that the demand side policy instruments are always more effective in achieving the macro economic objectives. But supply side policy sometimes will also helped , but it will be very few. using fiscal and monetary policy will also creates some problems. Government will usually charge taxes or reduce taxes in order to achieve their objectives.
References : - notebook , textbook
Originality: 100% unique content
kezia - 8b
Governments have achievements. They wanted to achieve 4 main objectives in macroeconomics, which are low and stable inflation, high and sustainable economic growth, and high and stable employment, and also stable international trade of balance of payment.
ReplyDeleteTo do this, government can use either demand side policy or supply side policy. A demand side policy instrument is affecting the aggregate demand by Fiscal and monetary policies. Fiscal policy involves public revenue, public expenditure, and borrowings/debt services. Monetary policy is in control of the central bank such as the Federal Reserve, interest rate, bank rate, cash revenue ratio, and statuary liquidity ratio.
How a fiscal policy works is that they control the spending of the economy by increasing or decreasing taxes. The problem in inflation is that they have too much aggregate demand, which causes the rise in cost. To create an aggregate demand, it will need an increase in household consumption, increase in investments, increase in government expenditure, and also exports minus import, or simplified, AD= C+I+G+(X-M) to solve the rise in inflation using the fiscal policy, government can increase tax rate to the people so the demand in goods and services can decrease, and by that the cost of goods may fall down and inflation is solved. Another problem is the high rate of unemployment. Unemployment is caused by the lack of aggregate demand. Government can imply the expansionary fiscal policy. Expansionary fiscal policy is where government increases the aggregate demand in a country by decreasing the tax rate. By doing this, more employees are motivated to work and do productive things and more enterprises are confident to start up a business. By decreasing the tax, more people are also motivated to purchase more goods and services because the prices are more affordable. This can increase the disposable income people have to spend. The expansionary fiscal policy is effective during the situation where the country is having a recession or a downturn. But during a prosperity situation, the government will need to take a brake, stop because the condition is increasing very high. To do this, government can implement the contractionary fiscal policy. This is where the government will try to reduce the demand by raising the tax rate. This is necessary to stabilize the international balance of payment.
In the other side, the monetary policy affects the country in terms of controlling the supply of money of the nation, the interest rates and the economic growth and stability. This is where the economic growth and international balance of payment is taken care of. During a country’s recession, the government can use expansionary monetary policy to reduce the interest rate and the opposite for a prosper condition. This is important because the rate of import shouldn’t be higher than the rate of the export. Another thing the monetary policy does is that it is also influencing the exchange rate of currencies against other currency, and this also affects the level of international trade and transaction.
Other than its benefits for implying the demand side policy instruments, the policy itself may cause quite a problem when it comes to these factors:
ReplyDeleteFirst of all, it is cumbersome to use, in other words, it is difficult to imply the rules to the people, it can cause many conflicts and different opinions, second, it may cause the crowding out effect to the private companies. This is the case where increased public sector spending replaces or drives down private sector spending. Third, an increase in taxes can lower the motivation of workers and employers to work, because they need to spend higher percentage their income to pay the taxes; they became lazy. The increase in taxes can also lower the motivation and confidence of a enterprise, the businesses may be afraid that they have to pay too much for the taxes that the business may fall down. And fourth, expansionary policies such as the fiscal policy may create further inflations when the people decides not to spend their incomes on goods on services from the country itself, but rather purchasing products and services based from foreign countries, or also known as import goods. The people might also have saved their money, and both of the factors above may not solve the inflation problem but its just wasting the opportunity of taxes to the government.
Now in the supply side policy instruments, they mostly use these types of factors, incentives to producers (selective), subsidies to customers, rules and regulations, labor market, education (training, universities, schools), PSE (public sector enterprise), and privatization.
To answer the question above, yes, the demand side policy instrument is more effective n achieving the macroeconomic objectives rather than the supply side policy instruments. This answer is based on the 2 economics school of thought theories, which are the classical economist, and the Keynesian economist. The Keynesian economist deals with the demand side policy instruments (1929-1933), despite the second theory from the classical economist, JB, he said that supply creates its own demand, which means he prefer supply policy because he thinks that when there is supply, there will be demand. They assume that aggregate production will generate an income enough to purchase all the output produced. But the Keynesian economist believes that in the view of a short run, especially during recessions, the economic output is strongly affected by the aggregate demand, they affect the production, employment, and inflation.
To clarify and conclude my answer, it is better using the demand side policy in terms of short run, just like the beliefs in the Keynesian theory, and in contrast, using supply side policy in terms of long run problems like the classical economists. Both sides have its own uses, both theories are needed, but the demand policy side guarantees more assurance in achieving governments’ objectives though it has its own flaws.
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References:
Notebook
http://en.wikipedia.org/wiki/Keynesian_economics
By Celine Kusnadi 8B
To achieve the macroeconomic objectives of a government, government usually uses policies. The major ones are 2-demand side policy and supply side policy. But usually demand side is more effective to obtain it. Is this always true? Hi I’m Theodore Benedict and in this article we’re going to discuss about is it always true that demand side policy instruments are always more effective in achieving the macroeconomic objectives than supply side policy instruments.
ReplyDeleteFirst of all, there are 5 macroeconomic objectives that government want to achieve:
1. Low and stable inflation
2. High and stable employment
3. Increasing National Income
4. Balanced BoP (Balance of Payment)
And now here comes the policies the fiscal and monetary. The fiscal policies are policy consists in managing the national budget and it’s financing so as to influence economic activity. In other words this is the policy that controls the budget of an economy and stuff. The monetary policy is the policy that takes controls of short terms rates. These 2 types are both in the demand and supply side policies in the government. Since usually or always there were never a condition that a government will have all everything stable. Usually these unstable conditions in the economy are Prosperity and Recession. Prosperity is the condition where inflation is high, increasing prices, increasing employment, and increasing balance of payment. That AD>AS (Aggregate Demand is more that aggregate supply) and increasing currency in the economy. In other words the economy is very good but it get go way over the limit. The inflation can be very high later. It’s like a car that accelerates too fast. If we don’t slow it down, it might crashes and become dangerous. This Demand side policy will be decreasing the effect of the over inflation and stuff. It will take care of the national Aggregate Demand. If the Recession situation it will be the other way around, that everything is going bad, there is deflation, decreasing prices, and unemployment, decreasing Bop and decreasing currency power. AS>AD. In other words, everything was very bad. Like there will be the end of the world. How are we going to stabilize the economy is using the supply side policy by increasing taxes to get higher salary and people will spend more money on other things and economy will increase in the country. So now we go to the main point of this article: Is it easier and more effective to use demand side policy instruments to control the economy compared to use the supply side instruments. Let’s take an example of we are driving a car, it took more power to accelerate rather than to brake. So we can also say that demand side is easier to be used and more effective compared to using supply side. Because sometimes people are harder to be motivated compared to people being stopped.
So the conclusion is that even though demand side usually became easier to control, but sometimes forcing is a easier way to get it done.
Theodore B
Source: Cornell Notebook
Originality: 100% unique content
There are four macroeconomic policy low and stable inflation, high and stable employment, economic growth in national output, a stable balance of payment. In a country government has to take some measures to achieve the objectives that they have. To achieve those objectives the government sets two policy instruments which are demand sides policy and supply side policy instrument. The demand policy instrument are used to manipulate aggregate demand in economy which in these means usually use to move to demand positively or in short to raise the demand. Whereas, for supply policies usually are used to raise outputs and employments. Demand side policy is related with aggregate demand and supply side policy is related with aggregate supply. In demand side policy it involve fiscal and monetary policies. Fiscal policies involve varying the overall level of public expenditure and taxation in an economy to manage aggregate demand and influence the level of economic activity. There are two types of fiscal policy expansionary fiscal policy and contractionary fiscal policy. Expansionary fiscal policy is if a government wants to increase aggregate demand in the economy to boost employment and output it can increase its expenditure or reduce taxation. A contractionary fiscal policy aims to reduce pressure on prices in the economy by cutting aggregate demand through a reduction in public expenditure or by rising taxation. The problem with fiscal policy is first fiscal policy is cumbersome to use, second increases in public expenditure crowds out private spending, third increasing taxes on incomes and profits can be reduce incentives to work and enterprise, fourth an expansionary fiscal policy creates expectations of inflation. Monetary policy involves changes in the money supply or interest rate in an economy to influence the level of aggregate demand. There are expansionary and contractionary monetary policy. Expansionary monetary policy involves a cut in interest rates or expansion in money supply to boost aggregate demand. Contractionary monetary policy involves raising interest rates or cutting money supply to reduce aggregate demand if the economy is over heating. supply side policies are designed to boost productive potential of an economy and increase aggregate supply of goods and services. Supply side policy instruments include selective tax incentives, a selective subsidies, improve education and training, labour market reforms, privatization.
ReplyDeleteBasically, these two policies are used to stabilize the economic system of the country. Through fiscal policy government is actually trying to create a high and stable employment rate because by increasing demand of course the production will increase and so the economy of the country will be growing and stable. Especially if it is done during economic recession period it could boost outputs and also reduce unemployment. This also can be combined with monetary policy which reducing the tax rate to ease the people so they will have higher spending ability and this also affecting the production level again as the people have the ability to buy, automatically the demand for goods and services will increase. Through monetary policy, savings and loan rate will be lower and in fact, people will tend to take loan from banks for many purposes. Some take this loan to start a business and some to enlarge their business. Both reasons, therefore will definitely reduce the level if unemployment and even causing the employment rate to be high and stable. This will have a positive impact to the economic growth and development as well. However, not all of these policies work perfectly. At times, when people have higher buying power, they tend to buy imported goods. When this happen, all those objectives to improve employment ass well as to raise the demand of goods and services cannot be achieved. Hence, aside from the policies they take, government has to consider other measures as well and have a very good control of all the activities in the country. some other measures that government shall consider such as the export and import rules and regulations as well as the limit amount of to be exported and imported. Other than that also, the regulations of bank loan as the people may take bank loan irresponsibly and also for unclear purpose that might bring negative impact to the country. Hence, rules and regulations in these sectors should be clear and strict to support the fiscal and monetary policies that the government takes to ensure these policies will support the government to achieve its objectives to stabilize the country’s economy.
ReplyDeleteReferences:
- Notebook
- Text book
- http://www.economicsguide.net/mv/a-level-tutorials/managing-the-economy/macroeconomic-policy-instruments/
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Vincent cia 8B
What is the macroeconomy? Macroeconomics is the study of how a national economy works.
ReplyDeleteThere are 4 government macroeconomics objectives =
1. Low and stable price inflation
2. High and stable employment
3. Economic growth in national output
4. A stable balance of international trade and payments
Demand side policy have 2 types of policy. There are fiscal policy and monetary policy. Fiscal policy may involves varying the overall level of public expenditure and/or taxation in an economy to manage aggregate demand and influence the level of economic activity.
1. Expansionary fiscal policy = If a government want to increase aggregate demand in the economy to boost employment and output it can increase its expenditure and/or redure taxation. This is called reflactionary or expansionary fiscal policy..
2. Contractionary fiscal policy = A deflationary or contractionary fiscal 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.
3. Fiscal policy instruments can also affect the distribution of income = Fiscal policy instruments may also be used to redistribute incomes between rich and poor people in an economy.
Problems with fiscal policy =
1. Fiscal policy is cumbersome to use = It is difficult to know precisely when and by how much to expand public spending or cut taxes by during an economic downturn. Boosting aggregate demand by increasing public spending and/or cutting taxes may cause and economy to 'overheat'.
2. Increases in public expenditure crowds out private spending = To finance an increase in public spending and/or cut in taxation a government may need to borrow 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.
3. Increasing taxes on incomes and profits can reduce incentives to work and enterprise = Increasing taxes on incomes and profits may reduce a worker's working effort.
4. An expansionary fiscal policy creates expectations of inflation = Consumers and producers in an economy may come to expect a future rise in inflation following an expansionary fiscal policy, expecially if attempts by their government in the past to boost demand and economic activity have caused the economy to overheat.
What is monetary policy ? Monetary policy involves changes in the money supply and/or interest rate in an economy to influence the level of aggregate demand and economic activity.
ReplyDelete1. Expansionary monetary policy = This involves a cut in interest rates and/or expansion in the money supply to boost aggregate demand.
2. Contractionary monetary policy = This involves raising interest rates and/or cutting the money supply to reduce aggregate demand if the economy is overheating and inflationary pressures are rising.
3. Exchange rate policy = Changes in interest rates can be used to influence the exchange rate of a national currency. An exchange rate is the rate at which one currency can be exchanged for another on the foreign exchange market.
Those includes in supply side policy instruments =
1. Selective tax incentives = High rates of tax on personal incomes may reduce people's incentives to work hard or even to seek paid employment, expecially if they can expect more generous welfare payments if they are unemployed.
2. Selective subsidies = A subsidy is a form of financial assistance paid to business or an economic sector by a government to help meet their costs.
3. Improving education and training = In order for firms to be successful when competing in the international markets it is essential they have access to a highly trained and skilled workforce.
4. Labour market reforms = Restrictions on the supply of labour to an occupation will force up the market wage and result in fewer jobs.
5. Competition policy = Some firms may be large and powerful enough to control the market supply of a particular good or service.
6. Removing trade barriers = In much the same way as a monopoly, a national government may seek to protect its domestics firms and labour free trade.
7. Privatization = Privatization involves the transfer of public sector activities, such as refuse collection, running a prison or public transport services, to private firms who may be able to provide them more efficiently because they have a motive to make a profit from this activities.
8. Regulation and deregulation = Regulations are rules and laws that restrict certain activities, such as shop opening hours and limits on noise and pollution levels, or set standards for products and for hygiene and safety to work places.
So in conlusion, demand side policy instruments are always more effective in achieving the macroeconomic objectives than supply side policy instruments.
By Leonardo 8B
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Most national government have four main economic objectives for their country’s economy. These are:
ReplyDelete1.a low and stable rate of inflation
2.a high and stable level of employment
3. positive economic growth and increased standards of living
4.a stable and positive balance of payments
In order to achieve or maintain the succession of these objectives, government uses policies and apply them in the economy of the country. There are two types of these policies which are monetary policy and fiscal policy. Fiscal policies are policies that are controlled by the government while monetary policies are policies that are controlled by the central bank of a country. Each of them has a demand side and a supply side. Demand-side policies are policies that can decrease or increase the aggregate demand of a country using a number of different policy instrument such as total public expenditure, level of taxation, and the rate of interest. Supply-side policies are policies that can increase or decrease the aggregate supply of a country by using a number of different policy instrument such as new regulations , changes to public taxes. Both supply side policy and demand side policy are needed to achieve and maintain the succession of government objectives. But how effective is the demand side policy ?
First, the amount consumers have to spend on goods and services depends on their level of disposable income after the income taxes have been deducted. Using the demand side policies instrument, the government can reduce the level of tax on income and the people may have more disposable income that they can spend on goods hence increasing the aggregate demand of a country.
Second, the taxes on profits will affect the amount of money firms have to invest in new productive capacity and their demand of labor. Using instruments of demand side policies, the government can reduce the tax on profits so that firms have more money and hence they can invest more of their money for the growth of their firms and hire more labor so that they can produce more products and increase the aggregate demand of a country
As interest rates rise, consumers may save more and borrow less to spend on consumer goods and services. By reducing the interest rate, people will save less and borrow more hence more people will be encouraged to spend more of their money. This may also encourage investments from overseas. As interest rates fall, firms may borrow more to invest and hence increasing the aggregate demand of the country. This will help prevent deflation in the future.
Government has their own objectives, which are called macroeconomic objectives. And there are four main macroeconomic objectives, which are :
ReplyDelete1) Low and stable infation in the general level of prices
2) High and stable employment
3) Economic growth in the national output
4) A stable balance of international trade and transactions
In order to achieve these objectives, there are policies that are meant to help government achieve these goals. There are two types of policies : Demand side policy and Supply side policy. Demand side policies may be use to influence aggregate demmand. While supply side policies can help to expand total output in an economy.
Supply side policies are aimed to boost the aggregate supply of the goods and services in an economy. By boosting the supply of goods and services in the economy of a country can help to raise the rate of the economic growth and employment of the country, it also helps to increase the supply of exports and reduce the infationary pressures, because there will be more goods and servicces that will be available to satisfy aggregate demand. They can use deregulation, which is a reduction in the level of regulations for business like health, which will reduce the cost of production and improve profitability. Privatization, which is the shifting of companies from the government ownership into private firms, which will increase the competition in the market. Promotion of free trade can also be done which will boost up exports and will open new regions for trade. Education and trainings can also be given to develop the productivity of workers and which will increase their job efficiency.
While demand side policy tries to influcence the level of aggregate demand in an economy using a number of different policy instruments, which are total public expenditure, the overall level of taxation and the rate of interest. Demand side policy is divided into two policies, which are fiscal policy and monetary policy.
Fiscal Policy is a tool that the government use to regulate the economy through it’s expenditure and raising of revenue throught taxation. It is the use of government revenue collection which is taxation and expenditure, which is the spending, to influencethe economy. There are two main instruments of fiscal policies, which are changes in the level and composition of taxation and the government spending in various secotrs. Demand side policy instruments are public expenditure, overall expenditure and rate of interest. Public expenditure and overall expenditure are part of fiscal policy. While rate of interest in part of monetary. Monetary policy itself is the process in which monetary authority of a country controls the supply of money and targets a rate of interest in purpose to promote economic growth and stability, it includes stable price and low unemployment. It refers to expansionary or contractionary, in which an expansionary policy increase the aggregate supply in the economy more rapidly than usual and the contractionary policy expands the money supply even more slowly than usual. Monetary policy is controlled by the central bank, like BI (Bank Indonesia), RBI (Reserve Bank of India) and Federal Reserves.
In conclusion, both the demand side policy and the supply side policy helps the government to achieve their objectives. But, in my opinion, demand side policies are more useful, because they are more efficient, as there are many ways to achieve it by demand side policy. While supply side policy can only help some of it. Especially in times when the economy of the country is unstable and in recession.
References : http://en.wikipedia.org/wiki/Monetary_policy, http://en.wikipedia.org/wiki/Fiscal_policy, textbook, notebook.
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Regina T. 8B
Increasing public expenditure can boost total demand and therefore stimulate higher output and employment in an economy. This is because when the government spend their money on improvements of the country such as building roads and bridges, they need labors. The labors will work and receive wages. These wages can be used by employees to buy goods and services to fulfill their needs and wants. By doing so, the government can also decrease the level of unemployment in the country and hence help the government to achieve their objectives.
ReplyDeleteBut there are also some drawbacks to using demand side policies. The drawbacks are :
1.Hard to use
The demand side policy is hard to use because it is difficult for a government to know precisely when and by how much to increase the public spending or cut taxes. Boosting to much aggregate demand by increasing public spending and cutting taxes may cause inflation because the supply of goods will be less and the price of each goods will increase
2.Increases in public expenditure crowds out private spending
To finance an increase in public spending or a cut in taxation a government may need to borrow the extra money it needs from other firms . The more money the private sector lends to a government, the less it has available to increase the size of firms . This is called crowding out. To encourage people, firms and the banking system to buy government stocks or bonds a government will raise interest rates. However, higher interest rates may discourage other people and firms from borrowing money to spend on consumption and investment
3.Less money for country growth
When using demand side policy instruments such as increase in the government expenditure and decrease in taxation, the government will receive or have less money and hence the government have less money to use on the economic growth of the country.
So, it would be better to use both side of policies because when using both sides the money governments spend and receive would be the same.
references:
ReplyDeletetext book
http://www.ehow.com/info_8239761_advantages-demand-side-economics.html
http://www.ehow.com/list_5986384_disadvantages-demand-side-economics.html
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The government has an important role in the country, they are the system that run or governs the area or state. As one of the biggest role in the country, the government is the one who takes initiatives to solve problems when they arise, as if they are not solved, it might hinder their four main objective they want to achieve, which are low and stable inflation, high and stable employment, high and sustainable economic growth and stable balance of payment. In order to solve these problems, government can implement policies in the country. There are two types of policy, the fiscal policy and the monetary policy. The fiscal policy is a policy wherein taxes play the biggest role and this is usually controlled by the government, other than taxes there are also public expenditure, public revenue and borrowings. Monetary policy is a policy run by the central bank of the country; they are the ones who control the interest rates.
ReplyDeleteThere are two policies instrument; the demand side policy instruments and the supply side policies instruments. The demand side policy is the one who control the aggregate demand while the supply side controls the aggregate supply. In both the poly, there are the expansionary and the contractionary. These sides are explained in situation where the country is, for example, when the country is in prosperity or in recession.
When the country is in prosperity, it tends to have high inflation, high employment and high economic growth, it could be said that they are in a high speed, and if this continues, hyperinflation could break out, the government acts as a break in this situation, by decreasing the public expenditure and total expenditure (Expansionary fiscal policy) and increase the rate of interest (Monetary contractionary polcy) so there would be less demand. If the country is in recession, the actions are the opposite the previous ones, the expenditures are increased and the rate of interest decreased, to increase the demand.
For the supply side, in prosperity, instruments like specific public expenditure, changes in individual taxes and new rules od regulation are controlled to that the supplies of product of the country increases the aggregate demand is greater than the aggregate supply. Those in recession would have to use the instrument to decrease the production as in the aggregate demand is less than the aggregate supply.
But as effective as the demand side policy is, they do have their cons as well. They are usually very cumbersome to use, meaning that it can be hard to implement it to the country. It also has the crowding out effect, from private to public. The demand side policy also can cause the increase in taxes, which may decrease the motivation of workers to continue working, And lastly, they might ignite the spark on inflation.
To conclude on what have been said above, both policy instruments have their pros and cons, the effectiveness of using either one of the policy is uncertain, as the depend on the situation/problem the country is currently facing, to measure on how effective it is, it must be first implemented correctly and maintained as well.
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Reference:
ReplyDeleteNotebook
http://en.wikipedia.org/wiki/Fiscal_policyhttp://en.wikipedia.org/wiki/Government
Government is the one who controls the city. Government has many objectives but there are four important objectives which are low and stable inflation, high and stable employment, high economic growth(national income) and positive balance of payment. In order to complete all of the objectives above, government have to use policies, there are 2 kinds of policies which are demand side policy and supply side policy. Demand side policy instruments includes public revenue(national income, like which come from the positive balance of payment), overall expenditure and rate of interest(monetary). Public expenditure and overall expenditure are also called as contractionary fiscal monetary policy. This demand side policy instrument is used when the condition of the country is in prosperity, where there is high inflation, high and stable employment, high economic growth and positive balance of payment (BoP). When its in the prosperity condition, the using of contractionary fiscal and monetary policy is used to decrease the aggregate demand (the total of demand of the final goods or services which are specifically in a certain amount of price and time). And supply side policy instrument consists of specific public expenditure, change in individual text, and new rules and regulations. Supply side policy is also known as expansionary fiscal monetary policy, government use this policy during recessions time, where there is the fall in price, decrease of national income, high unemployment, negative balance of payment (which mean there are more imports compared to exports) and the depreciating of the national currency. Expansionary monetary policy is used by government to increase the aggregate demand.
ReplyDeleteI agree that demand side policy is more affective to complete the objectives of the macroeconomy, even though demand side policy is affective, it doesn’t mean that supply side policy is not, its just demand side policy give more advantages compared to supply side policy, like: to accomplish low and stable inflation, according to demand side instrument, we can use fiscal policy, the government can increase the taxes, inflation increases because there are too many purchases done by the people, and this could lead to high inflation so the government increase tax, and when there is high tax, people will tend to save more compared to buy, and the government can increase the higher taxes on imported goods and lower taxes on local goods, this is in order to increase aggregate demand, because the people will prefer to buy the local goods, and this will increase aggrifate demand and the money will be in Indonesia, but if we spend money on goods like kfc, the money will go to America and no aggregate demand will be created.
Next is high and stable employment, the government can use expansionary fiscal policy, government can less the tax for firms and give them subsidy, this way they will be encouraged to increase their size and when they have a bigger size, they will eventually need more employees, but if the people don’t have enough requirement to be in the position needed by the firm, so this is where the national income is needed, to upgrade the level of education in Indonesia and make free schools for the poor children. And government can make the living standards in Indonesia better so there will be many MNCs who will want to open their factory here, and will create new jobs. Third is economic growth, the government can use expansionary fiscal policy, to increase national income, the people must buy the local goods, not the imported one, local goods are the one produced by Indonesian, such as batik, in order to increase the agrigate demand, government set Friday as a national batik day and everyone will buy batik, this will help the batik producers to keep producing. And government can increase the tax for imported goods, like the imported movies like divergent, have more tax than marmot merah jambu. When there is national income/gdp, government can give it back to Indonesian like by making new roads, upgrading the standards of living and educations, and then indonsia maybe one day will become MEDC not LEDC. And the last one is positive balance of payment. There are 2 kinds of balance of payment, positive and negative. Most of LEDCs have negative balance of payment while MEDCs have positive balance of payment. Because LEDCs need to import many goods from abroad, and they have less goods to export so they have negative balance of payment, here government can use contractionary fiscal policy, this means the government should try to reduce the demand of people to the imported goods and more to local goods, and also increase the exports and lessen the imports, so that the country will have more gdp.
ReplyDeleteSo in conclusion, both of the policies are effective, but demand side policy is more effective because it gave more advantages than the supply side goods.
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Reference: notebook, http://en.wikibooks.org/wiki/Macroeconomics/Macroeconomic_Objectives, https://www.google.com/#q=what+is+aggregate+demand
Demand-side policy instrument is the control from government which regulates country tax which mostly effect the country’s aggrigate demand, while supply-side policy instrument is the control from government which forms like making new rules and regulations, giving firms subsidies, give special treatment to firms as supplier and other factors which regulates and controls the country’s aggrigate supply.
ReplyDeleteDemand-side policy could be accomplished when a country has either too high demand or too low demand. If too high demand is there and cause a very high inflation, government would increase the tax for each good to be very high so that aggrigate demand could be re-stable and inflation could be lower and more stable. If too low demand is there, government would decrease the tax as low as possible so that more people would be able to buy the goods which then will increase the aggrigate demand which stabilize the country’s economic inflation.
The government objective could be done directly using demand-side policy. By just regulating the tax, either increasing or decreasing it, the effect will automatically change. However, that is not with the supply-side policy.
Supply-side policy would be done when a country’s supply is very high or low other than four basic government objectives. When the supply is very low, government will give subsidies to supplier or producer in order for them to expand and grow bigger so that they can increase their sales and increase their productions which then will increase the aggrigate supply. Same with to make unemployment rate fall, by giving subsidies to firms, which then the money could be used for expanding their business, so that the producer could create more workplaces. And if the country’s aggrigate supply is very high, then using supply-side policies government would make new rules and regulation to restricct further productions or by just limit the allowance number of unit could be produced such as now, Indonesian new rules and regulation, SNI for mostly mechanical goods such as toys, speaker, etc.
However, as we can see, supply-side policy would be done indirectly, means when government wants their objective to be accomplished, they need second hand to accomplish the objectives. And the second hand is the producer or we could just call supplier. However, supplier then use the money to expand their business, increase the sales, but then the money earned from the bigger sales are now being exported to their former country, such as America for KFC, Nike, Adidas, etc. which not to be used for re-expanding the business in Indonesia.
So, we can conclude that it is true that demand-side policy is much more effective than supply-side policy which first because it works directly and second is they work more absolutely in getting the results.
However, by just focusing to use demand-side policy is not too good because by just regulating tax, when people get richer, then they could not care for the tax of the goods which makes the aggrigate demand to keep rising even though increasing the tax is applied. Making or creating new rules and regulation or work together with companies are also useful if contracts or terms and conditions promise is made, so long it will be okay.
So, from above results, we can conclude that a country’s management would be good if both demand and supply side policies instruments are applied correctly.
Source : Notebook
DeleteOriginality : 100%
There are four main objectives of a government. First, Low and Stable Infation. Second, High and Stable Employment. Third, High and Sustainable Economic Growth. And the last one is Stable BoP ( Balance of Payment ) and Regulating International Trade. To achieve these objectives, the government better to apply government policies in the economy. There are two types government policies, which are demand side policies and supply side policies.
ReplyDeleteDemand Side Policies affects the Aggregate Demand ( AD ). In macroeconomics, Aggregate Demand ( AD ) is the total demand for final goods and services in the economy at a given time and price level. There is a formula for Aggregate Demand ( AD ), which is C + I + G + ( X – M ). C is consumption ( may also be known as consumer spending ) = ac + bc( Y – T ), where Y is consumers income and T is taxes paid by consumers. I is investment, G is Government spending, X is total exports, and M is total imports.
Government will use policy instruments, which are fiscal policy and monetary policy. Fiscal policy and monetary policy are included in demand side policies. Fiscal policy is the use of government revenue collection ( taxation ) and expenditure ( spending ) to influence the economy, or else it involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand ( AD ) and the level of economic activity. Fiscal policy is included public revenue. And the public revenue also included taxes. The money from the tax will take by the government which will be used for public better facilities ( transportation, road, and other else ).
Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc. Public expenditure include capital investment, new investment, developing infrastructure, public goods, merit goods, current expenditure, and also defense. Merit goods can make the demand side policy more effective because merit good provide free education for lower people. So, they can study until collage and they can get a better work in the future. And it can make the economic growth become good. And the last one is borrowing and debt services. Borrowing is to receive something from somebody temporarily, expecting to return it. Borrowing is divided into two, they are domestic and international.
Monetary policy is the process by which monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. Monetary policy include Central Bank, Bank Indonesia, Reserve Bank of India ( RBI ), and also Federal Reserve. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in order to avoid the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.
Demand side policy instrument can be more effective than supply side policy. Supply side policy instrument include incentives to producers, rules and regulations, education and training, subsidies to consumers, labour market, Public Sector Enterprises ( PSE ).
In conclusion, demand side policy instrument can be more effectives than the supply side policy instruments. Why demand side policy instrument can be more effective than supply side policy instrument? Because the demand side policy have public revenue. Public revenue include direct taxes and indirect taxes. Rich people will pay more taxes. Why? Because it to reduce to buy goods, while poor people will pay less taxes. So, demand side policy instrument can be more effective than supply side policy instrument.
ReplyDeleteReferences :
• http://en.wikipedia.org/wiki/Aggregate_demand
• http://en.wikipedia.org/wiki/Borrowing
• Notebook
• Textbook
Originality : 95%
There are four basic objectives. These include a low and stable inflation, a high and stable employment, a high and sustainable growth, and a stable balance of payment and regulating national trade. In order to achieve these aims the government is given policy instruments to ease the job. These policies are divided into 2, demand side policies and supply side policies.
ReplyDeleteDemand side policies are the policies that will affect the aggregate demand. This includes the fiscal and the monetary policies. The aggregate demand consists of C + I + G + (X – M). C being the household consumption, I stand for the firms’ investment, G for government expenditure and (X – M) for export minus import. Anything that affects this factors affects the demand hence the government have policy instruments that does just that. They tend to use this for short-term changes – if inflation is getting too high then they will increase the interest rates to cool the economy down. Fiscal policy and monetary policy are again divided into 2, contractionary fiscal and monetary policy and expansionary fiscal and monetary policy. The contractionary policies are used to slow down an economy if they are overheating, whilst expansionary is the opposite.
There are 2 situations in an economy. Prosperity, where inflation, employment and growth rate is high with a stable BOP; and the other is recession where there is low inflation, national income, economic growth and very high unemployment with deteriorating BOP. Prosperity shows that the economy is moving too fast hence in order to ‘brake’ or slow down the economy they use the contractionary fiscal and monetary policies ex. Increase in interest rates, increasing reserve requirements, reducing money supply, etc. On the contrary, the recession situation uses the expansionary policy in which encourages inflation ex. less tax, more government expenditure, etc.
Now supply side policies are the opposite of demand side policies. Supply side policies are the policies that affect the aggregate supply. They consist of incentives to producers (grants, tax holiday, etc), subsidies to consume, rules and regulations, labor market, education (training), PSE, and privatization. They focus on increasing our workforce productivity by improving education and welfare reforms. They are usually long term policies.
There are 2 economic schools of thought that have contradicting theories. The first would be the classical economics that says that the market is perfect and self-sustaining, that government intervention is only a detriment to the economy. J.B. Say’s law is that supply creates its own demand, that the economy is stimulated when more goods are produced. On the other hand, the Keynesian theory begs to differ. John Maynard Keynes says that consumer income stimulates demand that causes economic growth. He also said that the government should stimulate the growth in the economy, especially when it is lacking.
ReplyDeleteHowever demand side policies also have their problems. First and foremost, it is cumbersome to use. They also have a crowding out effect since in contradictionary fiscal and monetary policies the higher the tax the higher the government’s public fund, thus it is inefficient by competition. Third is that the taxes increase hence results in low motivation to work and low enterprise, Lastly expansionary policies (fiscal and monetary) results in inflation.
So, to conclude my essay I agree with the Keynesian theory in which it is said that the government should intervene to help stabilize the market. The government has 2 instruments that will help them to do so, and even though they have their own disadvantages, they can be beneficial to the government. Demand side policies for short-term problems and supply side policies for long term.
Charlene 8B
References:
- Notebook
- http://tutor2u.net/economics/revision-notes/as-macro-supply-side-policies.html
- http://en.wikipedia.org/wiki/Demand-side
- http://termsexplained.com/525232/contractionary-monetary-policy
- http://termsexplained.com/477870/contractionary-fiscal-policy
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ReplyDeleteThe objective of macroeconomic policies is to maximize the level of national income, providing economic growth to raise the utility, high employment and low and stable inflation. Policies designed to affect aggregate demand: fiscal policy and monetary policy. Supply-side policies are mainly micro-economic policies designed to make markets and industries operate more efficiently and contribute to a faster underlying-rate of growth of real national output. There are some advantages that make demand side policies are more effective in achieving the macroeconomic objectives and sometimes supply side policies also may be more effective than the demand side policies, below, I will discuss both which one is more effective in order to achieve the macroeconomics objectives. The main object of economic management are fiscal policy and monetary policy. Fiscal policies 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. And monetary policy involves the use of interest rates to control the level and rate of growth of aggregate demand in the economy. But in demand side policies they control the aggregate demand and in supply side policy they control the aggregate supply in the market some fiscal policy actions are intended to meet short-run goals of stabilizing the economy. Other fiscal policy actions are intended to have long-run effects by expanding the productive capacity of the economy and increasing the rate of economic growth. Actions that have long-run effects are sometimes referred to as supply-side economics. A. The Long-Run Effects of Tax Policy The difference between the pre-tax and post-tax return to an economic activity is known as the tax wedge. The tax wedge applies to the marginal tax rate, which is the fraction of each additional dollar of income that must be paid in taxes. The following are the effects on aggregate supply of cutting taxes. 1. Reducing marginal tax rates on individual income will reduce the tax wedge faced by workers, thereby increasing the quantity of labor supplied. Cutting individual income tax rates also raises the return to entrepreneurship and the return to saving. 2. Cutting the marginal corporate income tax rate would encourage investment spending by increasing the return corporations receive from new investments in equipment, factories, and office buildings. Cutting the corporate income tax rate can potentially increase the pace of technological change. 3. Lowering the tax rates on dividends and capital gains increases the supply of loanable funds from households to firms, increasing saving and investment and lowering the equilibrium real interest rate. B. Tax Simplification If the tax code were greatly simplified, the economic resources currently used by the tax preparation industry would be available to produce other goods and services. In addition to wasting resources, the complexity of the tax code may also distort the decisions made by households and firms. A simplified tax code would increase economic efficiency by reducing the number of decisions made by households and firms solely to reduce their tax payments. C. The Economic Effect of Tax Reform If tax reduction and simplification are effective, the economy will experience increases in labor supply, saving, investment, and the formation of new firms. Economic efficiency will also be improved. Together, these factors will result in an increase in the quantity of real GDP supplied at every price level. A successful policy of tax reductions and simplifications will benefit the economy by increasing output and employment and, at the same time, may result in smaller increases in the price level. D. How Large Are Supply-Side Effects, Most economists agree that there are supply-side effects to reducing taxes: Decreasing marginal income tax rates will increase the quantity of labor supplied, also cutting the corporate income, tax will increase investment spending, and so on.
ReplyDeleteThe magnitude of the effects is subject to considerable debate. The size of the supply-side effects of tax policy can be resolved only by careful study of the effects of differences in tax rates on labor supply and saving and investment decisions. Supply-side policy
ReplyDeleteSupply side policy includes any policy that improves an economy’s productive potential and its ability to produce. There are several individual actions that a government can take to improve supply-side performance. Improving productivity of factors Measures to improve factor productivity, which is the marginal output generated by factors inputs, include the following: Using the tax system to provide incentives to help stimulate factor output, rather than to alter demand, is often seen as central to supply-side policy. This commonly means reducing direct tax rates, including income and corporation tax. Lower income tax will act as an incentive for unemployed workers to join the labour market, or for existing workers to work harder. Lower corporation tax provides an incentive for entrepreneurs to start and so increase national output. Other supply-side policies include the promotion of greater competition in labour markets, through the removal of restrictive practices, and labour market rigidities, such as the protection of employment. For example, as part of supply-side reforms in the 1980s, trade union powers were greatly reduced by a series of measures including limiting worker's ability to call a strike, and by enforcing secret ballots of union members prior to strike action. Measures to improve labour mobility will also have a positive effect on labour productivity, and on supply-side performance. This improves labour market flexibility. Better education and training to improve skills, flexibility, and mobility – also called human capital development. Spending on education and training is likely to improve labour productivity and is an essential supply-side policy option, and one favoured by recent UK governments. A government may spend money directly, or provide incentives for private suppliers to enter the market. Government may also set and monitor standards of teaching, and force schools to include a skills component in their curriculum. The adoption of performance-related pay in the public sector is also seen as an option for government to help improve overall productivity. Government can encourage local rather than central pay bargaining. National pay rates rarely reflect local conditions, and reduce labour mobility. For example, national pay rates for Postmen do not reflect the fact that in some areas they may be in short supply, while in other areas there may be surpluses. Having different rates would enable labour to move to where it is needed most.
So, as the conclusion, both supply and demand side policies can have their own effectiveness and it also depend on what situation is happening in that country
Originality : 87%
Reference : Notebook
By Richard Sanders