Demand Side & Supply Side Policies – Flashcards
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Goals of demand-side policies
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Price stability, full employment, economic growth
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Demand side policies definition?
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Change AD
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Discretionary policy definition?
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Active and purposeful gov intervention to influence AD
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Types of discretionary policy
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Fiscal policy, monetary policy
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Stabilization policy definition?
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Attempt to reduce short run fluctuations in the business cycle
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Sources of gov. revenue
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Taxes, sale of goods and services, sale of gov. owned property
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Types of gov. expenditure?
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Current expediters, capital expenditures, transfer payments
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Government budget definition?
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Annual plan for gov. tax revenue and expenditures
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Types of gov. budgets?
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Balanced budget: Revenue=expenditure Budget deficit: Expenditure>revenue Budget surplus: Expenditure<revenue
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Public debt definition
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Annual deficits added up
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Fiscal policy definition?
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Manipulation by gov. of its taxes and spending to influence AD. Impacts C + I + G
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Expansionary vs. contractionary fiscal policy?
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Expansionary: eliminate recession by increasing AD -Increase gov. spending -Decrease personal income taxes -Decrease business taxes Contractionary: eliminate inflation by decreasing AD -Decrease gov. spending -Increase personal income taxes -Increase business taxes
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Keynesian model Ratchet effect?
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Price level doesn't change
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Automatic stabilizer definition?
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Factors that reduce short-term business fluctuations without gov. interventionist
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Automatic stabilizer examples
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Progressive taxes, unemployment benefits
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Fiscal policy & long-term economic growth?
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Indirect effects: -People and firms desire stable economy -Avoiding inflation and recession allow for planning -Bigger shifts in LRAS -> Direct effects: -Gov. spending on tech and infrastructure -Gov. spending on human capital -Provide incentives to encourage investment -LRAS shifts -> & AD shifts in short term
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Fiscal policy strengths?
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-Pulls economy out of deep recession -Deals with rapid and escalating inflation -Ability to target sectors of economy -Direct impact of gov. spending on AD -Ability to affect potential output
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Fiscal policy weakness?
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-Problems of time lag -Political constraints -Crowding out: deficit spending (G goes up, I goes down) -Inability to deal with supply-side causes of instability -In a recession tax may not increase AD -Inability to fine tune the economy
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Monetary policy definition
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Done by a country's central bank (government office)
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Interest rate definition
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Money paid in addition to principal
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Money definition
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Anything acceptable as payment for goods and services
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Interest rates and governments?
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Equilibrium rate of (i) determines (Dm) Central banks determines (Sm)
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Interest rate impact?
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Investment + consumption
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Expansionary vs. monetary policy?
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Expansionary: -Country has recessionary gap -Gov increases money supply -Interest decreases, investment and consumption increases -AD shifts right Contractionary: -Country has an inflation -Gov decreases money supply -Interest increases, investment and consumption decreases -AD shifts left
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Inflation targeting definition?
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Government's announced target for future inflation
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Advantages of inflation targeting
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-Lower inflation rate -More stable rate of inflation -Improved ability of economic decision-maker to anticipate future rate of inflation -Greater coordination between monetary & fiscal policy -Greater central bank transperency
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Disadvantages of inflation targeting
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-Reduced ability of central bank to pursue other macroeconomic objectives -Reduced ability of central bank to respond to supply side shocks -Reduced ability of the central bank to deal with unexpected events -Finding an appropriate target is hard -Difficulties of implementation
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Strengths of monetary policy?
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-Relatively quick implementation -Central bank independence -No political constraints -No crowding out -Ability to adjust interest rates incrementally
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Weakness of monetary policy?
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-Time lags -Possible ineffectiveness in recession (Banks may not increase their lending, consumers and businesses may avoid taking loans) -Conflict between gov. objectives -Inability to deal with stagflation (Demand-side policy solution, can't address recessionary gaps due to AS down)
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Supply side policies definition?
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Government policies which focus on shifting LRAS curve right
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Supply-side policies goals?
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-Increase potential output & longterm growth -Unconcerned with stabilizing business cycle -Concerned with increasing quality & quantity of factors of production
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Interventionist policy definition?
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Depend on gov. involvement to grow potential output
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Interventionist policy examples
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-Investment in human capital -Investment in new tech -Investment in infreastructure -Industrial policies
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Market based policies definition
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Focus on making market system more efficient and competitive
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Market based policies examples
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-Encouraging competition (Privatization, deregulation) -Labour market reforms (Abolish minimum wage) -Incentive related policies (Lowering taxes)
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Evaluating supply side policies
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-Time lags -Impact on economic growth (Increases in potential output) -Arguments favoring interventionist policies (Allows gov. to support firms) -Arguments favoring market based policies (Gov. involvement may cause inefficiency) -Ability to create employment (Doesn't effect cyclical) -Ability to reduce inflationary pressure -Impact on gov. budget -Effects on equity (Interventionist policies may increase equity, market based decrease) -Effects on environment negative
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Attempts to fix cyclical unemp
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-Strengths of fiscal policy (Pulls economy out of recession, AD goes up) -Weakness of fiscal policy (Time lags, political constraints, crowding out, inability to fine tune) -Influence of automatic stabilizer (Progressive income taxes and unemp benefits make recession) -Strengths out monetary policy (Quick implementation, central bank independent) -Weakness of monetary policy (Time lags, possibly ineffective in deep recession)
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Natural unemployment
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-Interventionist supply side measures (Structural: setting up retaining programs, frictional: improving info flows, seasonal: provision of info on other industries) -Market-based supply (Labour market reforms that increase labour market flexibility, measures aimed at all types of NRU)
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Inflation policies: demand pull
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-Strengths of fiscal policy (Dealing with rapid & escalating inf, direct impact of gov.) -Weakness of fiscal policy (Time lags, political constraints, inability to fine tune) -Strengths of monetary policy (Quick implementation an incremental adjustment of interest rates, central bank independence) -Weakness of monetary policy (Time lags, conflict among gov. objectives)
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Inflation policies: cost push
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No one solution, must look at root of issue
