Demand Management Policy’s

Readers Question: Recommend appropriate demand management policy measures to the government

The two main types of demand management policies are:

1. Monetary Policy
2. Fiscal Policy

To some extent the exchange rate could be used to influence aggregate Demand, but, in practice it is not a significant influence

Fiscal policy involves changing government spending and taxation. Therefore in a recession, the government could pursue expansionary fiscal policy and try to increase AD. For example, cutting taxes might help to stimulate the economy and create a positive multiplier effect.

However, it is worth bearing in mind fiscal policy has many limitations such as:

• crowding out
• time lags
• Impacts on government spending and taxes may distort economic behaviour
• See: Problems of fiscal policy for more

Monetary policy involves cutting or raising interest rates. See: evaluation of Monetary policy in controlling inflation