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Demand-side and Supply-side Policies

Demand-side and Supply-side Policies. Macroeconomics Section 3.4. Automatic stabilizers when economy overheats. Social benefits and taxes can act as automatic stabilizers. Automatic stabilizers in recession. Social benefits and taxes can act as automatic stabilizers.

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Demand-side and Supply-side Policies

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  1. Demand-side and Supply-side Policies Macroeconomics Section 3.4

  2. Automatic stabilizers when economy overheats • Social benefits and taxes can act as automatic stabilizers

  3. Automatic stabilizers in recession • Social benefits and taxes can act as automatic stabilizers

  4. Fiscal and Monetary Policies Demand-side & Supply-side Policies

  5. Discretionary Stabilization Policies

  6. Demand-side Policies

  7. Expansionary Fiscal Policies (in recession)

  8. The Government Budget and the National Debt (Public Debt) • Government Budget = annual government spending • Budget Surplus = Tax Receipts > Spending • Budget Deficit = Tax Receipts < Spending • National Debt = Money borrowed domestically and/or internationally (foreign debt) to balance the budget • National Debt often expressed as % of GDP

  9. Contractionary Policies (in inflation)

  10. Strengths of Fiscal Policy

  11. Weaknesses of Fiscal Policy

  12. The Neoclassical/Monetarist Challenge • Argument that discretionary fiscal polices that try to stabilize the economy are so flawed that they actually cause instability Monetarist argue that governments should: • Take a long-term view about spending and taxation to achieve social priorities • Ensure steady supply of money • Ensure price and wage flexibility • Focus on supply-side policies to achieve economic growth

  13. Supply-side PoliciesMarket-orientated/ Interventionist-orientated

  14. Growth Policies

  15. Supply-side Policies Market-orientated

  16. Market-orientated Policies

  17. Market-orientated Supply-side Policies: Objectives

  18. Reduce Government Sector

  19. Reduce Government Sector: Pros and Cons

  20. Improve incentives by lowering taxes

  21. Improving incentives : Pros and Cons

  22. Make labor more responsive to supply and demand

  23. Make labor more responsive to supply and demand : Pros and Cons

  24. Supply-side Policies Interventionist-orientated

  25. Government policies to improve industry

  26. Government policies to improve industry: Pros and Cons

  27. Shifting the SRAS and the LRAS in the AS-AD Model

  28. The Multiplier, accelerator and crowding effect HL Topics

  29. The Multiplier Effect

  30. Marginal Propensity 1

  31. Example of the Multiplier in Effect Assumption 60% of additional income spent on Consumption (MPC = 0.6) The Multiplier = 1/1-MPC

  32. The Multiplier Effect

  33. The Accelerator Theory & the Combined multiplier/accelerator effect • Argues that small changes in GDP produces larger changes in investment spending. • These fluctuations interact with the Multiplier effect to increase the momentum of business cycle.

  34. Crowding-out Effect

  35. Crowding-out Effect

  36. Crowding-out Effect

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