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.

Section 3.3 and 3.4 Formative Reflection

In studying Supply-side and Demand-side policies in lessons 3.3 and 3.4, I was able to learn a lot about the effects of government intervention through both fiscal and monetary policies in the economy. A fiscal policy is a policy enacted by the government to alter taxes, spending, and the flow of capital. By raising or lowering taxes while increasing or decreasing government spending, fiscal policies are able to regulate an economy’s demand. Additionally, by controlling the flow of capital in an economy with payouts, a government can regulate an economy’s supply as well. A monetary policy is a policy that alters the interest rates in an economy. This can increase or decrease the consumer’s disposable income, thus regulating the demand within an economy.

Neoclassical economics argues that governments should have limited or no intervention in the economy, and that any intervention only serves to worsen the state of the economy. Contrary to this, Keynesian economics argues that governments should play an active role in regulating an economy’s supply and demand. In the formative examination, I scored myself with an 8/10. I did this feeling I had a strong  understanding of the macroeconomic concepts discussed in class. I was able to identify how demand and supply adjustment were able to create inflation in an economy. In my analysis of the situation however I failed to provide real world examples to link my knowledge of the concepts to the real world. I believe that in the upcoming summative assessment I will provide examples to show how my understand is applicable to the modern world.