The document discusses macroeconomic policies used by governments to influence aggregate demand and supply. It explains that fiscal policy involves varying public expenditure and taxation to manage demand, while monetary policy changes interest rates and the money supply. Expansionary policies boost demand during recessions by cutting taxes or lowering interest rates. Contractionary policies reduce demand to curb inflation by raising taxes or interest rates. The document also discusses supply-side policies aimed at boosting productivity through incentives, education, deregulation, and other measures.

2. In a macro economy, the government uses
certain policies in order to influence or
control the aggregate demand and supply of
the economy
These policies include Demand Side Policies
& Supply Side Policies

3. These policies try to influence the level of
aggregate demand in an economy
This is done by using a couple of policy
instruments
1. total public expenditure
2. levels of taxation
3. the interest rates

4. Fiscal
Policy
Expansionary
fiscal policy
Contractionary
fiscal policy
Monetary
Policy
Expansionary
monetary
policy
Contractionary
monetary
policy

5. Fiscal policy
It involves varying the
overall level of public
expenditure and taxation
rates in order to manage
or control the aggregate
demand in an economy
Monetary policy
It involves changes in
the money supply and
interest rates in an
economy to influence the
aggregate demand in an
economy

8. This policy is usually used during an
economic recession
It is used in order to boost the aggregate
demand in an economy
Cutting taxes on profits enables
producers to spend more
Cutting taxes on incomes may encourage
workforce to increase productivity

9. Cutting taxes on incomes may also increase the
disposable income of consumers
However some consumers may just save the
surplus money
Or some consumers may spend more on
imported goods and services
An expansionary fiscal policy may also
create a budget deficit
In may eventually creates expectations of
inflation

10. This policy aims to reduce aggregate
demand in an economy
This is done by reducing public expenditure
or increasing taxation
This way the budget deficit may go in a
surplus
However it may reduce employment and
output

11. Advantages of
Fiscal Policy
1. Fiscal policy instruments
can bring about equality
in the distribution of
income
Disadvantages
of Fiscal Policy
1. Fiscal policy is
cumbersome to use
2. Increases in public
expenditure decreases
private spending
3. Increasing taxes can
reduce incentives to
work and enterprise

12. This involves a cut in the interest rates and
expansion in money supply to increase demand
It is used when unemployment is rising and
economic growth is falling
Monetary policy is decided by the central bank
A cut in interest rates will encourage more people to
borrow
Lower interest rates can increase consumer
expenditure and investment expenditure
This will boost output and increase employment

13. More money supply can result in consumers
having a higher amount of money to spend
on goods and services
However excessive growth in money supply
can result in inflation

14. This involves raising interest rates and
cutting money supply to reduce aggregate
demand
This is considered in a situation of inflation
Increasing interest rates will encourage more
consumers to save rather than spend
However this may result in rising
unemployment and falling economic growth

15. Increasing interest rates encourages saving
thence increasing exchange rate
This may solve the problem of inflation
Decreasing interest rates decreases
exchange rates
This may solve the problem of
unemployment and may improve the foreign
exchange of an economy

16. These are designed to boost productive
potential of an economy to increase the
aggregate supply of goods and services
These will help reduce inflation,
unemployment and boost production of
goods for exports

17. Selective tax incentives
Selective subsidies
Improvement in education and training
Labour market reforms
Competition policy
Removing trade barriers
Privatization
Regulation and deregulation

19. Tax incentives and relief fund provided by
the government may encourage people to
invest more
Investing in modern technology may make
production processes efficient

20. A subsidy is a form of financial assistance
provided to a business by a government
This decreases the cost of production for
private producers
Businesses can expand there operations
using subsidies

21. The government aims to improve the
educational infrastructure and training sector
This will increase labour productivity

22. Changes have to be made in laws related to
market of labour
A restriction in the supply of labour will
increase the wage price
A government may introduce such laws o
reduce the power of trade unions
However employment funds provided to
labour may make individuals lazy

23. The government will make certain rules and
regulations to control monopolies
Government can also influence the supply of
an economy by putting restrictions on
imported goods
However when trade barriers are removed
globally this will increase the total supply in
the world

24. Privatization is a process in an economy
when the public sector firms are sold to the
private producers
The supply of goods and services will
increase due to the high level of efficiency

25. Regulations are the laws a business has to
abide by
These are set to protect some industries
from unfair competition
It also protects the rights of labours
These are set to protect consumers from
misleading advertising and to protect the
environment

26. Deregulations is a process in which certain
laws nd rules are eliminated
This provides freedom of decision making of
producers
These may help to remove production costs
as well
Deregulations help to reduce production
costs