The Effectiveness of Demand Side and Supply Side Policies to Achieve Economic Growth

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Policies are imposed in an economy to promote economic growth which is increasing real GDP. Policies essentially either aim to increase in aggregate demand or aggregate supply. There are demand side policies and supply side policies. Demand side policies become important during recession or period of economic stagnation. Supply side policies are important for determining long run growth in productivity. These will be further discussed in this essay. Demand side policies aim to deal with just the demand and therefore change (increase) the aggregate demand in the economy. This needs to be done during recession period most of the time. If there is spare capacity (negative output gap), then demand side policies can play a role in increasing economic growth. For example if we decrease interest rates, we will increase the demand in the economy as people have more money as their mortgage costs are decreased. It is the same idea with lowering taxes - this will boost demand, as people have more money to spend as less is taken away from them by the government. Aggregate demand is made up of consumption (consumer spending, Investments Government spending and Exports (minus) imports (Net exports). If anything affects these factors will result in affecting the demand. For example, if inflation is getting too high, interest rates will be increased to stabilize the economic growth in the economy. This is the result of having the economy already close to full capacity which means that a further increase in AD will mainly cause inflation. Demand side policies include monetary policy and Fiscal policy. Monetary policy are actions of central bank, currency board or other regulatory committee that determines the size and rate of growth of the money supply, which in turn affects interest rates. It is maintained through actions such as increasing interest rates, or changing the

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