Evaluation of Demand-side

and Supply-side Policies

to promote low unemployment,
low and stable rate of inflation
and economic growth
By: Shiven Jain and Mahira Ahuja
Demand-side policies
Demand-side policies are
intervention-based aimed at
influencing aggregate demand
in an economy to achieve
macroeconomic objectives.

These policies focus on

managing the components of
AD, which include consumption,
investment, government
spending, and net exports.
 Demand-side policies
Monetary Fiscal
This involves the management of money supply
and interest rates by a central bank to influence This involves the use of government spending
AD. The central bank can use tools like open and taxation to influence AD. Expansionary fiscal
market operations (buying and selling policy involves increasing government spending
government securities), changing reserve and/or reducing taxes to stimulate economic
requirements for banks, and adjusting the activity during times of recession or low growth.
discount rate (the rate at which banks borrow Alternatively, contractionary fiscal policy involves
from the central bank). By lowering interest reducing government spending and/or
rates, for example, the central bank aims to increasing taxes to cool down an overheating
stimulate borrowing and investment, thus economy and control inflation.
boosting AD.
 Supply-side policies
Supply-side policies focus on increasing the
productive capacity and efficiency of an economy
in order to promote long-term economic growth
and improve economic performance.

Unlike demand-side policies, which primarily aim

to manage AD, supply-side policies seek to
influence the aggregate supply side of the
economy, aiming to enhance factors such as
productivity, innovation, and flexibility.

These policies are often associated with

promoting efficiency, reducing costs, and
removing barriers to production and trade.
 Supply-side policies

market-based market-based incentive- interventionist

to increase for the labour related
competition market education or other
personal forms of training
deregulation creating greater
income tax cuts improving quality,
privatisation flexibility
business tax quantity and access
trade reducing power of
cuts to health care
liberalisation labour unions
decreasing research and
anti-monolpoly reducing
capital-gains development
regulation unemployment
tax provision of
benefits
infrastructure
abolishing
industrial policies
minimum wage
 Policies for low unemployment-
cyclical unemployment
Cyclical unemployment is caused by low aggregate demand.
Expansionary demand-side policies, including monetary and fiscal
measures, aim to address it. These policies intend to shift Aggregate
Demand (AD) towards potential output (Yp), reducing the
recessionary gap.

Monetary policy allows incremental adjustments and easy reversals,

but it may be limited in deep recessions when interest rates hit zero.
Fiscal policy can directly impact AD, especially during severe
recessions, and offers the advantage of targeting specific economic
sectors.
Automatic stabilizers like progressive taxes and unemployment
benefits help mitigate recession severity.

Supply-side policies primarily influence potential output and may

not directly reduce cyclical unemployment.
Interventionist supply-side measures could indirectly impact
demand positively, contributing to reducing cyclical unemployment.
Policies for low unemployment-
natural unemployment
Structural unemployment, the most serious type of natural
unemployment, is the focus of policies aimed at reducing
the overall natural rate of unemployment.
Demand-side policies are generally ineffective in
addressing structural unemployment due to their
potential to cause inflation when the economy is already
at potential output.
Fiscal policy can indirectly affect structural unemployment
through supply-side effects, which are part of
interventionist supply-side policies.
Policies for low unemployment-
natural unemployment
Interventionist supply-side measures to reduce structural
unemployment.
Frictional unemployment reduction measures aim to improve
information flow between employers and job seekers.
Seasonal unemployment reduction measures involve providing
information to workers about job opportunities during off-peak
seasons in other industries.
These policies directly reduce unemployment but may strain
government budgets and have opportunity costs.

Market-based supply-side measures include labor market

reforms.

While these measures can reduce the natural rate of

unemployment without affecting government budgets, they may
exacerbate income inequality and reduce protections for low-
income workers.
 Policies for low and stable
rate of inflation
To achieve a low and stable rate of inflation, governments and central
banks can implement a combination of demand-side and supply-side
policies.
On the demand side, monetary policy tools such as interest rate
targeting, open market operations, and reserve requirements can be
used to control inflation.
Fiscal policies such as taxation and government spending can also be
employed to reduce aggregate demand and inflationary pressures.
On the supply side, labor market reforms, including investment in
training and education, and increasing flexibility in labor markets, can
enhance productivity and reduce cost-push inflation.
Market deregulation, such as removing barriers to entry and privatization,
can increase competition and efficiency, leading to lower prices and
reduced inflation.
Additionally, infrastructure investment can help reduce production costs
for businesses, further contributing to price stability.
By implementing these policies, governments and central banks can
work together to achieve and maintain a low and stable rate of inflation.
Policies to promote economic growth
To promote economic growth, governments often employ a mix of fiscal and monetary
policies, as well as structural reforms.
On the fiscal side, governments can increase spending on infrastructure, education, and
healthcare, which not only creates jobs but also enhances productivity and human
capital.
Tax cuts and incentives can stimulate investment and consumption, further boosting
economic activity.
Monetary policy tools, such as lowering interest rates and quantitative easing, can
encourage borrowing and investment, leading to increased spending and economic
growth.
Additionally, structural reforms, including deregulation, labor market reforms, and
investment in research and development, can improve productivity and
competitiveness, driving long-term economic growth.
By implementing these policies in a coordinated manner, governments can foster an
environment conducive to sustained economic growth.
Thank you
very much!