Demand Side Policies

Topics: Monetary policy, Federal Reserve System, Central bank Pages: 3 (758 words) Published: August 13, 2013
Demand-side Policies

Kristen L. Stack

American Military University

Demand-side Policies

Every few years, countries experience some economic downturns, also known as a recession. Companies begin to lay off workers, consumers stop spending money, and the average person is put into a financial bind. A recession is defined as a significant decline in activity across the economy, lasting longer than a few months. (Investopedia) More easily put, it’s a big drop in consumer spending that results in loss of jobs, income and business profits. Which results in more bankruptcies, both personal and business, and higher unemployment rates because there are too many people chasing the few jobs that are available. A recession generally lasts about 6 to 18 months, and interest rates usually fall during these months to stimulate the economy. In general, a recession will end when the economy starts to grow usually for 2 or more business quarters. This means that companies are hiring again, consumers are spending and businesses are investing. That doesn’t mean everyone has gotten their jobs back or businesses are back to where they were prior to the recession. It just means the overall economy is expanding or growing on a somewhat consistent basis.

Fiscal policy is the means by which a government adjusts its level of spending in order to monitor and influence a nation’s economy. It is the “sister strategy” to monetary policy with which a central bank (i.e. the Federal Reserve) influences a nation’s money supply. (Investopedia) The two policies together are used in an effort to direct a country’s economic goals. Fiscal policy is based on the theories of British economist John Maynard Keynes. It basically states that governments can influence productivity levels by increasing or decreasing tax levels and public spending. In turn, this curbs inflation, increases employment and maintains the value of money. Although, tuning the economy through...

References: Investopedia US, A Division of ValueClick, Inc. (2013)
http://www.investopedia.com/terms/r/recession.asp
Federal Reserve Education.
http://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy/
Federal Reserve Bank of New York, Current Issues In Economics and Finance. Vol 18. Number 2. (2012)
http://www.newyorkfed.org/research/current_issues/ci18-2.pdf
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