Question

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

Under the demand-side policy we try to find the determinants that bring changes to the aggregate demand. This includes several policy measures such as a tax cut, a rise in government spending, an increase in money supply that shift AD curve to the right. Similarly a tax hike, a fall in government spending, a decrease in money supply would shift AD curve to the left.

Take for example, the tax cut. It increases disposable income so it increases consumption as well. Since consumption is the largest component of AD higher consumption would shift AD to the right.

Similarly, for the supply side, some may prefer to use supply-side policies because of its effect on the supply side of the economy which will bring reduction in inflation rate and a rise in output. Tax cuts, investment credits, increased investment towards technology would help in shifting the AS curve to the right.

Take for example, the tax cut. It encourages workers to supply more labor. As labor supply is increased wages are reduced and so total production is higher. AS curve shifts right when production is higher.