Demand-side and Supply-side Policies on Economic Growth Case Study

Demand-side and Supply-side Policies on Economic Growth - Case Study Example These policies are either expansionary (catalyze spending in a recessionary economy) or contractionary (reduce spending in an inflationary economy). Also, supply side policies are those policies employed by the government to increase the country’s productivity hence shifting the aggregate curve outwards. They also are designed to affect an economy’s ability to produce goods and services. They increase the country’s aggregate productivity over time and improve the potential of the economy to produce. These policies are always expansionary with an aim increasing an economy’s production capacity which translates into increased living standards (Sloman, 2006). Demand side policies are further broken down to fiscal and monetary policies. Fiscal policies are those policies that are aimed at bringing changes in the government spending or taxes collected while monetary policies aim at bringing changes to the money supply engineered by the central bank. Expansionar y policies are then defined as those policies designed to stimulate economic growth through changes in real Gross Domestic Product (GDP) and the potential output of the economy (Economics Online, 2013). The policies are characterized and implemented in the demand side by any of the four categories of expenditure i.e. consumption expenditure, investment expenditure, government expenditure, or net export expenditure that constitutes the Gross Domestic Product (GDP). On the supply side, the expansionary policies are designed to add flavor to the capacity of production of the economy through labor policies (education, immigration, retirement), capital accumulation, research and development (seeking technological improvements), or promotion of resource availability. Monetary policies lower rates of interest that accompany an increase in money supply hence affecting investment expenditure. A monetary policy would increase the amount of local currency available in the exchange market which will then weaken the rates of exchange with other currencies. Also, the lower rates of interest will make the economy unattractive to investors when compared to other economies which will lead to a capital overflow resulting in the sale of domestic assets and the currency in the exchange market resulting in an ultimate weak currency. A weaker currency makes exports relatively cheaper to foreign buyers hence will stimulate the demand for the local goods while at the same time imports will be more expensive to domestic buyers leading to a reduced demand for imported goods (Pettinger, 2011). This will result in an increase in Net Export expenditure. In times of large deficits in the budget, fiscal policies tend to be missing from the policy maker’s ideologies. These policies are easy to legislate as they are politically popular and supported. Monetary expansionary policies are ineffective and unpredictable compared monetary contractionary (Sloman, 2006). In a case where the wea k economic growth or high level of unemployment worries the Federal Reserve, the policy will react by increasing bank reserves by open market purchase (where the central bank buys or sells government bonds on the open market to manipulate the short term interest rate and supply of base money in an economy) prompting banks to convert their reserves into loans to their customers.