Use of demand management policies to try to achieve full employment and economic growth
To achieve these objectives, the government reflates the economy by injecting demand into the economy
Expansionary or reflationary Monetary policy
- cutting interest rates - however as the economy approaches full employment, the expansion of demand tends to draw in too many imports and/or increase inflation
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- These problems may force the government to reverse policy in order to reduce the level of AD
Deflationary policies - can be used to reduce inflationary pressures to improve B of P
- increase interest rates (monetary policy)
- Public spending cuts and increased taxes (fiscal policy)
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