Evaluate the Effectiveness of Demand Side Policies on Inflation

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Evaluate the effectiveness of demand-side policies to reduce inflation Plan: * Define demand-side policies and inflation * Differentiate between fiscal policy and monetary policy * How they can be used to reduce inflation – changing tax, government expenditure, changing money supply and altering i/r and exchange rates * Explain the benefits / downsides of using demand-side policies against using supply side measures and physical policies Demand side measures, or demand management, are policies used to reduce inflation by altering aggregate demand and are usually associated with Keynesian economics. Inflation is the persistent or continuous rise in the general price level or a fall in the value or purchasing power of money. It is usually measured using a consumer price index. Demand-side policies can be divided into two different types of policies; fiscal policy and monetary policy. Fiscal policy concerns the use of changes in the amount of taxation (T) and government spending (G) to influence the national economy. Changing G will directly affect aggregate demand as AD calculated through the equation AD = C + I + G + (X-M). Not only does fiscal policy affect AD but also aggregate supply, however the affect on AD will be much more immediate whereas AS is affected indirectly over a longer period of time. Monetary policy concerns three main methods of government intervention in an economy; changing the money supply, changing interest rates and the exchange rate. Monetary policy will also indirectly affect AS, as well as directly affecting AD. The two policies are interconnected through public borrowing, as a particular policy will have an effect on the other. The first area to look at within Fiscal policy is Taxation. Direct taxes such as income tax, national insurance contributions and indirect taxes such as VAT can all be altered to affect AD

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