How Can Supply and Demand-Side Policies be Used to Assist Businesses?

An important concern for all economists is protecting the industries in an economy. Without adequate industries and businesses, an economy can not reach it’s full output potential, and suffers. In order to ensure that these corporations are able to survive in the economy, the government can enact a number of fiscal and monetary policies (covered in the last two posts). These include policies that are both supply-side and demand-side.

A supply-side policy is a policy aimed at regulating the aggregate supply of an economy. This can include both fiscal and monetary policies. A fiscal supply-side policy is a policy aimed at supporting industry growth and change. This includes government spending to increase private research and development in order to increase the economy’s efficiency, increasing AS. Additionally, The government can cut business taxes to allow more business spending and expansions, or even improve transit systems to reduce business costs. A  monetary supply-side policy is a policy aimed at regulating the flow of capital in the economy. By either bringing more capital into or draining money out of the economy, the government can alter the money flow and therefore regulate the AS in the economy.

A demand-side policy is a policy aimed at regulating the aggregate demand of the economy. This can include both fiscal and monetary policies, covered in previous blog posts (see below). These policies look at altering the AD of an economy in order ensure consumer security by preventing (or provoking) a recession or inflation.

In order to protect business in the economy a government can reduce production costs associated with the aggregate supply and increase aggregate demand in order to increase consumer spending. By improving the economy’s infrastructure and reducing business tax and production costs (like wages), a government can reduce the aggregate supply of the economy. Then, by increasing spending on consumer benefits, such as working incentives, the government can move the AD in order to protect the businesses in the economy.

How Can Monetary Policies Be Used to Assist the Elderly?

In an economy, economists face difficult decisions when dealing with the retired population. A retired population within an economy acts with much differently than a working population. The working population depends on income in order to build assets and be able to buy goods and services in their life. But, by the time a member of the working population chooses to retire, they depend completely on the assets they’ve built during their working lifetime in order to support their livelihood. However, one of those assets is generally a large nest egg saving deposited in a bank. That means that these investments are reliant upon the interest rates imposed by the banks to allow them to grow. By incorporating monetary policies, a government can protect these savings for the retired population in the community. A monetary policy represents a policy that adjusts the interest in the economy. By raising interest rates, the government can effectively protect the savings of the elderly by assuring their assets grow steadily on an annual basis. This works because as the interest rate increases, the saving grows by a larger percentage annually.

How Can Fiscal Policies Be Used to Protect the Working Class?

In economics, many economists worry about the protection of the working middle class. This sector of the economy is generally understood to be very sensitive to economic adjustments. Any drastic changes in the aggregate demand or aggregate supply of an economy has been shown to have the most substantial impacts on the middle class. In addition, the middle class generally makes up the majority of the economy, meaning that if it is put under economic stresses, the entire economy suffers.

For this reason economists commonly devise fiscal policies to try and protect the middle class and it’s workers. A fiscal policy is a policy aimed at controlling the AD by increasing or decreasing government spending and taxation. The government can use these policies to protect the middle class by a number of means. By granting them tax deductions, the government is able to increase the real income of the middle class workers. By increasing spending on middle class benefits such as health and safety plans aimed at protecting the unemployed, the government is also able to protect the middle class.

Economic Indicators

In economics, certain indicators can predict economic shifts and changes in AS and AD. These indicators, known as economic indicators, can be grouped into two categories:

Leading indicators are indicators in the economy that can be used to predict economic activity before it occurs. These indicators are important to economists as it allows them to use information from the economy to predict and manipulate aspects of the economy in order to prevent market failure. Certain leading indicators include stock changes, changes in debt and money supply in an economy.

Lagging indicators are indicators in the economy that follow economic activity. While these indicators cannot be used to predict economic activity, it can be used to reflect upon the effect on economic changes. This is important as it allows economists to see the effects of economic changes in order to predict how to prevent these effects in the future. Lagging indicators can include changes in interest rates, changes in consumer price index (CPI) and unemployment.

Investment Surges in Renewable Energy

Trends in 2010 have lead to an increase in investment for renewable energy by around 34%. An investment in renewable energy by a government would affect the economy’s aggregate supply (AS). This is because with renewable energy, there will be a decrease in production costs, a factor of the AS curve. By saving costs in the production phase by reusing resources, forms will have more capital to spend of increasing production and expanding. This will lead to a shift to the right for the AS curve as the total production possibility of the economy increases. This shift will lead to a drop in average prices and an increase in Real GDP as the economy produces more. This decrease in average prices can be seen in Figure 1 as the shift from P to P1. Additionally, the increase in Real GDP can be seen as a shift right from Y to Y1. This will most likely lead to an expansion in economic capacity in the long run as there is less spending on long term production costs, leading to an increase in production and therefore in a rise in Real GDP in the economy.