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Demand-side and Supply-side Policies

Demand-side and Supply-side Policies

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Demand-side and Supply-side Policies

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  1. Demand-side and Supply-side Policies Macroeconomics Section 3.4

  2. Automatic stabilizers when economy overheats • Social benefits and taxes can act as automatic stabilizers

  3. Automatic stabilizers in recession • Social benefits and taxes can act as automatic stabilizers

  4. Fiscal and Monetary Policies Demand-side & Supply-side Policies

  5. Discretionary Stabilization Policies

  6. Demand-side Policies

  7. Expansionary Fiscal Policies (in recession)

  8. The Government Budget and the National Debt (Public Debt) • Government Budget = annual government spending • Budget Surplus = Tax Receipts > Spending • Budget Deficit = Tax Receipts < Spending • National Debt = Money borrowed domestically and/or internationally (foreign debt) to balance the budget • National Debt often expressed as % of GDP

  9. Contractionary Policies (in inflation)

  10. Strengths of Fiscal Policy

  11. Weaknesses of Fiscal Policy

  12. The Neoclassical/Monetarist Challenge • Argument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instability Monetarist argue that governments should: • Take a long-term view about spending and taxation to achieve social priorities • Ensure steady supply of money • Ensure price and wage flexibility • Focus on supply-side policies to achieve economic growth

  13. Supply-side PoliciesMarket-orientated/ Interventionist-orientated

  14. Growth Policies

  15. Supply-side Policies Market-orientated

  16. Market-orientated Policies

  17. Market-orientated Supply-side Policies: Objectives

  18. Reduce Government Sector

  19. Reduce Government Sector: Pros and Cons

  20. Improve incentives by lowering taxes

  21. Improving incentives : Pros and Cons

  22. Make labor more responsive to supply and demand

  23. Make labor more responsive to supply and demand : Pros and Cons

  24. Supply-side Policies Interventionist-orientated

  25. Government policies to improve industry

  26. Government policies to improve industry: Pros and Cons

  27. Shifting the SRAS and the LRAS in the AS-AD Model

  28. The Multiplier, accelerator and crowding effect HL Topics

  29. The Multiplier Effect

  30. Marginal Propensity 1

  31. Example of the Multiplier in Effect Assumption 60% of additional income spent on Consumption (MPC = 0.6) The Multiplier = 1/1-MPC

  32. The Multiplier Effect

  33. The Accelerator Theory & the Combined multiplier/accelerator effect • Argues that small changes in GDP produces larger changes in investment spending. • These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.

  34. Crowding-out Effect

  35. Crowding-out Effect

  36. Crowding-out Effect