Readers Question: Recommend appropriate demand management policy measures to the government
The two main types of demand management policies are:
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
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Which of he following policies is generally considered to be the most effective demand management policy? a. fiscal polcy,b foreign policy, c. monetary policy, d trade poicy.
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