Demand Side Expansionary Policies

Question 1

Expansionary Fiscal Policy Definition

Answer 1

refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.

Question 2

Expansionary Monetary Policy Definition

Answer 2

Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy. (Increase money supply decrease interest rates)

Question 3

Expansionary Monetary Policy and Expansionary Fiscal Policy Diagram

Answer 3

Keynesian
AD shifts to the Right

Question 4

Expansionary Monetary Policy and Expansionary Fiscal Policy Diagram Explanation

Answer 4

In this Diagram, the Economy is experiencing a recessionary gap as there is an increase in aggregate demand as seen in the gap from AD2 to AD1. Read GDP is lower than its optimal level at Yp and the Average price level has fallen from AP2 to AP1. When Expansionary policy is employed the aggregate demand rises because the money supply is increasing and interest rates are decreasing. As AD shifts to the right from AD1 to AD2 the recessionary gap is closed.

Question 5

Monetary Policy Advantages and Disadvantages

Answer 5

Monetary Policy is often used as the first responder in times of inflation because it has several advantages over fiscal policy. The advantages of monetary policy are:
Monetary policy is flexable meaning it can respond quickly to changing economic conditions. Central banks can often decided on interest rates.
Monetary policy reversible meaning that if intrest rate have increased or decreased more than necessary this can easily be reversed
Monetary policy is implemented by the Central Bank and the central bank is independent from the government which means policies are not influenced by political pressure. (Apolitical)
When there is mild recession monetary policy is an effective policy however when the recession becomes sever monetary policy alone is not enought. The limitations of monetary policy are:
There is limited room to lowere interest rates further when they are already close to zero
Monetary Policy is not very effective when consumer and business confidence is low because cutting intrest rates may not induce more borrowing and spending.

Question 6

Fiscal Policy Advantages and Disadvantages

Answer 6

Fiscal policy can be used instead of monetary policy because it can target specific sectors of vulnerable groups inn need. The advantages of fiscal policy are:
Fiscal policy is necessary when there is deep recession. When the government injects additional government expeindiciture consumer and business confidence increases.
Ficalcal policy incules Automatic stabilizers which are institusionaly built in features that can stabilize fluctuations in the business cycle without the need of government intervention.
The limitations of Fiscal Policy are:
Fical policy is carried out by government officials and so it can be influence by political pressures. Ellected officila are unlikely to raise taxes and cut government spending because it is politically unpopular.
Fiscal policy takes a a longer time to implement compared to monetary policy because chnages have to be debated and voted on before they are implemented.