The demand side policies are one of the key macroeconomic policies that can be utilized by the government to achieve economic stability. These policies entail the increase in the aggregate demand of the goods and services, in the economy, hence achieving high amounts of revenue. Demands side policies can be effectively divided into monetary and fiscal policies. Monetary policies are those policies that are implemented by the country’s Central Bank while fiscal policies are the policies that are implemented by the government to achieve economic stability.
The policies that are used to increase economic growth through real GDP, changes in potential economic output, or a combination of the two are referred to as expansionary policies. Expansionary policies could be classified into four key types of expenditure in order to achieve economic growth in line with the demand side policies. These expenditures include investment, net exports, consumption, and government expenditure.
Tax cuts by the government increases the amount of disposable incomes among consumers hence increasing the level of consumption. In addition, tax cuts motivate investors hence increasing the level of induced investments in any particular economy. The change in government expenditure is tailored at directly affecting government expenditure. With such instances, the government reinforces the established fiscal policies in order to reduce the amounts of other expenditures.
Monetary policies affect the level of investment expenditure through lowering the rates of interest. This occurs in line with an increase in money supply in the economy and changes in expenditure on net exports. Therefore, a surplus of dollars in foreign markets is brought about by the expansion of monetary policies by the Central Bank. This leads to weaker rates of exchange between other currencies of trade and the Dollar, which is negates the country’s economy. Moreover, it keeps off investors; thus, reducing investments in the economy due to lower rates of return on investment expenditure compared to that from other countries. Lower rates of interest lead to increased capital outflows from a country. Thus, this stimulates the domestic sale of a country’s assets and the dollars on the exchange markets. The dollar weakens and the exports of the country become cheaper compared to those of the trade partners. With the decrease in the price of the exports, there would be increased demand for the goods produced by the country, which increases amounts of revenues from exports. On the other hand, the weakening of the dollar makes goods from foreign countries more expensive for domestic importers hence discouraging imports. This lowers the level of imports that the country gets from foreign countries leading to a surplus balance of payments.
Demand side policies could be viewed from an expansionary or contractionary perspective. Expansionary policies are principally applied during a recession as they are meant to stir up the level of expenditure and strengthen the economy. Contractionary policies are applied during inflation in order to reduce the levels of money supply in the economy. All these policies are always aimed at strengthening the economy and avoid unfavorable factors that could derail economic development.
It must be noted that expansionary and contractionary policies are executed separately. This is because of the changes in the economic cycles over the years. Fiscal expansionary policies are reinforced politically; thus, making it easier for them to be executed. The expansion in fiscal policies worsens the deficits in the economy in cases where a deficit budget is used by the government. This increases the national debt of the country due to increased borrowing from other countries. According to the GDP ratio, the economy would not be sustained due to the high level of the national debt. Contractionary policies are done out favor and are not commonly used in the economy. This is because they are applied as dictated by the conditions of the economy or not. They are only applied at the discretion of policy makers within the economy. In times of large budget deficits, fiscal policies would not be effective in the regulation and stabilization of the economy.
In depth discussions indicate that contractionary policies are prone to being in inadmissible politically hence making them unfavorable in the stabilization of the economy. Therefore, they are not regularly applied as policies to correct the economic situation of a country. Expansionary policies involve increased government expenditure or a reduction in the rates of taxes charged by the government. Both of these measures could also be applied jointly, which helps in the stabilization of the economy. These policies would only apply in cases where the economy operated below its full employment level. The operation below full employment level means that the economy does not deliver its expected output. There are excess resources in the economy that are not utilized, and there is less pressure on the level of the policies that are applied.
The use of expansionary fiscal policies was first based on the General Theory of the Great Depression, Money and Interest. This work emerged as a reaction to what had occurred during the Great Depression that had adversely affected the economies of most countries across the globe. Through this work, governments were urged to ensure that they increase the effective demand for the goods that are produced within their countries. This increase in the demand for goods does not apply to private firms in the economy. This gave the government the green light to collect all the notes within the economy and put them in bottles before concealing them in holes dug all over the country. People would reach the extent where they will exhume all the bottles around the country and put all the money to use at the same time. This is motivated by the increase in the purchasing power of individuals within the economy. The book also asserts that the government can increase induced investments within the economy by increasing its expenditure.
The public would be benefited through employing most of the unemployed individuals, which helps to reduce joblessness within the economy. The unemployed would benefit through vital projects that are specifically tailored towards reducing the level of unemployment within the economy. There would be a circular flow of income as the employed individuals spent part of their salaries on the goods and services that are produced by firms in the economy. Excessive expenditure on goods and services would lead to the depletion of existing inventories. Accordingly, the high levels of employment would replenish the depleted inventories through increased production of goods and services by employed individuals.
When dealing with a real economy, it is easy to rule out that expansionary fiscal policies will be efficient in raising real level of GDP. According to the feedback role of markets of finance, this is not normally possible. It must be noted that the demand for money depends on the change in the aggregate demand hence the expansionary policies lead to an increase in aggregate demand.
The Federal Reserve applies in circumstances where there are open markets to buy securities in the economy. This is usually derived from treasury agents who pay for them with reserves that are newly created. Reserves that find their way to the bank will elicit an action by the bankers where the bankers convert the surplus reserves into loans. These are loans made available to the customers at low interest rates hence increasing the level of economic activities within the country.