Question

Explain one of the reasons why policy makers usually focus on demand-side policies to achieve their macroeconomics goals as opposed to the supply-side ones.

Answer 1

Macroeconomics is the study of economic issues at macro level i.e.at the level of economy as a whole.It has certain goals to achieve,mainly they are high economic growth,development,low employment and stability in the economy.In order to find a way to achieve the goals a lot discussion took place among the economists and the process continues.As per the classical economists,the level of economic growth is determined by the supply side factors.They believed that the supply creates its own demand,so if we want to increase the level of output in the economy,we should focus on increasing the supply of goods and services in the economy.Until the great depression in the US and world economy,this classical theory was quite popular but it was seen that it failed to address the issues of the situation and hence was severely criticized by J M KEYNES.Here keynes propounded his new theory that level of welfare and pace of growth is determined by the aggregate effective demand of goods and services in the economy.It is not the supply side factors that determine the level of growth but the demand side factors that shows the status of economy.It also shows and determines the level of output in the economy,the level of employment and thus the national income of the country.Hence the effective demand is decisive and determines the achievement of the major economic goals.Demand side factors include consumption,investment,government expenditure and net exports.An expenditure in the form of consumption results in somebody's income,hence raising their purchasing power so they would demand more and would lead to more employment in the economy to produce more output in the economy.Investment causes multiplier effectss in the economy.So the problem of depression can be addressed by boosting the above factors. Also,Aggregate supply depends upon the physical and technical conditions in the economy,which does not changes much in the short run.

So policy makers mainly focus on demand side factors to achieve macroeconomic goals.