Demand side policies are policies that are made by the govt in order to stimulate any or all of the components of aggregate demand. This refers to the deliberate changes in govt expenditure and income so as to achieve desired economic objectives such as economic growth and the reduction of unemployment. Also, supply side policies are policies that the government imply as to increase the productivity of a country and shift the aggregate supply curve outwards.
One way of increasing the component of consumption expenditure by the govt is by reducing direct and indirect taxation. When the govt reduces taxes such as income tax, it directly increases consumers’ disposable income. The govt may also increase welfare benefits such as children’s allowance, unemployment benefits or pensions, which would have a similar affect. The reduction of indirect taxes, such as surcharges on utility bills or possibly other taxes linked to products/services of inelastic demand, could also have a positive effect. A problem that may arise in this case would be that consumers would save rather than spend the money.
The use of fiscal policy in stimulating investment may take many forms. Reducing direct taxes like corporation tax, and indirect taxes on raw materials and power provision, also helps to increase retained profits and stimulate new investment and employment. Govt may also increase its expenditure in terms of direct or indirect assistance to firms (example upgrading of industrial estates, promotion in foreign markets, fiscal incentives for investing in alternative sources of energy, educational grants and training schemes etc.)
A third and direct component of AD is govt expenditure. A govt in order to increase employment and stimulate economic growth may opt for an expansionary fiscal policy and what is called a cyclical deficit, which occurs when the...