demand and supply side policies

comprehensively explains what demand and supply side policies are.. :)

1. By: Batool Mehdi Demand & Supply Side Policies

2. Introduction In a macro economy, the government uses certain policies in order to influence or control the aggregate demand and supply of the economy These policies include Demand Side Policies & Supply Side Policies

3. Demand Side Policies These policies try to influence the level of aggregate demand in an economy This is done by using a couple of policy instruments 1. total public expenditure 2. levels of taxation 3. the interest rates

4. Types of Demand Side Policies Fiscal policy It involves varying the overall level of public expenditure and taxation rates in order to manage or control the aggregate demand in an economy Monetary policy It involves changes in the money supply and interest rates in an economy to influence the aggregate demand in an economy

5. Fiscal Policy

6. Monetary Policy

7. Expansionary Fiscal policy This policy is usually used during an economic recession It is used in order to boost the aggregate demand in an economy Cutting taxes on profits enables producers to spend more Cutting taxes on incomes may encourage workforce to increase productivity

8. Cutting taxes on incomes may also increase the disposable income of consumers However some consumers may just save the surplus money Or some consumers may spend more on imported goods and services An expansionary fiscal policy may also create a budget deficit In may eventually creates expectations of inflation

9. Contractionary Fiscal Policy This policy aims to reduce aggregate demand in an economy This is done by reducing public expenditure or increasing taxation This way the budget deficit may go in a surplus However it may reduce employment and output

10. A dvantages of Fiscal P olicy 1. Fiscal policy instruments can bring about equality in the distribution of income Disadvantages of Fiscal P olicy Fiscal policy is cumbersome to use Increases in public expenditure decreases private spending Increasing taxes can reduce incentives to work and enterprise

11. Expansionary M onetary Policy This involves a cut in the interest rates and expansion in money supply to increase demand It is used when unemployment is rising and economic growth is falling Monetary policy is decided by the central bank A cut in interest rates will encourage more people to borrow Lower interest rates can increase consumer expenditure and investment expenditure This will boost output and increase employment

12. More money supply can result in consumers having a higher amount of money to spend on goods and services However excessive growth in money supply can result in inflation

13. Contractionary Monetary P olicy This involves raising interest rates and cutting money supply to reduce aggregate demand This is considered in a situation of inflation Increasing interest rates will encourage more consumers to save rather than spend However this may result in rising unemployment and falling economic growth

14. Exchange r ate Policy Increasing interest rates encourages saving thence increasing exchange rate This may solve the problem of inflation Decreasing interest rates decreases exchange rates This may solve the problem of unemployment and may improve the foreign exchange of an economy

15. Supply Side Policies These are designed to boost productive potential of an economy to increase the aggregate supply of goods and services These will help reduce inflation, unemployment and boost production of goods for exports

16. Supply Side Policy Instruments Selective tax incentives Selective subsidies Improvement in education and training Labour market reforms Competition policy Removing trade barriers Privatization Regulation and deregulation

17. The impact of implementing supply side policies

18. Selective T ax Incentives Tax incentives and relief fund provided by the government may encourage people to invest more Investing in modern technology may make production processes efficient

19. Selective Subsidies A subsidy is a form of financial assistance provided to a business by a government This decreases the cost of production for private producers Businesses can expand there operations using subsidies

20. Improvement in Education A nd Training S ector The government aims to improve the educational infrastructure and training sector This will increase labour productivity

21. Labour Market Reforms Changes have to be made in laws related to market of labour A restriction in the supply of labour will increase the wage price A government may introduce such laws o reduce the power of trade unions However employment funds provided to labour may make individuals lazy

22. Competition Policy The government will make certain rules and regulations to control monopolies Government can also influence the supply of an economy by putting restrictions on imported goods However when trade barriers are removed globally this will increase the total supply in the world

23. P rivatization Privatization is a process in an economy when the public sector firms are sold to the private producers The supply of goods and services will increase due to the high level of efficiency

24. Regulation and Deregulation Regulations are the laws a business has to abide by These are set to protect some industries from unfair competition It also protects the rights of labours These are set to protect consumers from misleading advertising and to protect the environment

25. Deregulations is a process in which certain laws nd rules are eliminated This provides freedom of decision making of producers These may help to remove production costs as well Deregulations help to reduce production costs

26. T hank You!