Question

For this discussion board, explain one of the reasons why policymakers usually focus on demand-side policies to achieve their macroeconomic goals as opposed to the supply-side ones. Be sure to include concepts from the chapters.

Provide one example of a demand-side policy and explain why and how it causes the aggregate demand to shift.

Similarly for the supply side, you need to explain one of the reasons why some may prefer to use supply-side policies.

Provide one example of a supply-side policy and explain why and how it causes the aggregate supply to shift.

Answer 1

Introduction

In economics, keeping the country at an equilibrium position is extremely important. The core reason for this is the fact that too much inflation or recession causes grievous problems in a country in which unemployment may rise or lead to reduced output levels and life style issues in the country.

Whenever these problems arise in an economy, adjustments need to be made to the demand or supply side of the aggregate economy.

The reason why countries prefer demand side policies up and above supply side ones is because demand creates its own supply. In short if you increase the supply of goods and services in a country which has no demand, it would push prices down and lead to disequilibrium in the country. The exact opposite happens when you reduce supply and there is still existence of demand.

On the contrary, if you regulate demand, it has the power to regulate supply by itself as companies have profit as their only motive of existence.

Demand Side Economics Example: -

For example, during a recession, the federal bank reduces the rate it charges commercial banks for providing loans. This in turn makes loans cheaper for individuals as well as companies which then demand more goods and the economy comes to a normal. This happens due to the increase in supply of money in the economy. The exact opposite is done during inflation as the Federal Reserve increases the interest rates and shrinks the supply of money in the economy respectively.

Supply Side Corrections: -

Supply side moves around the concept of changing tax rates, allowing globalization and liberalization etc. They aim at increasing the supply by providing incentives to producers or through allowing imports into the country. Usually for an economy experiencing inflation, this has higher chances of success if applied alone as supply can be increased to match demand.

However, supply side corrections alone cannot stimulate the economy to demand more unless availability of credit is increased or other ways are used to increase the total capital available for overall consumption.

Please feel free to ask your doubts in the comments section.