Government policies which affect aggregate demand

Activity 1

(a) Governments can use a combination of expansionary fiscal policy tools to address sluggish economic activity and
stimulate aggregate demand.

 Increased Government Spending: This involves the government injecting more money into the economy by investing
in infrastructure projects, social programs, or public services. Expand_more This creates jobs and increases disposable
income for citizens, leading to higher consumption spending. Expand_more

 Decreased Taxes: By lowering taxes, the government leaves more money in the pockets of individuals and
businesses. Expand_more This can incentivize them to spend more, invest more, or hire more workers.

(b) Expansionary fiscal policy occurs when the Congress acts to cut tax rates or increase government spending,
shifting the aggregate demand curve to the right. Contractionary fiscal policy occurs when Congress raises tax rates or
cuts government spending, shifting aggregate demand to the left.

(c) When the government increases its spending, it stimulates aggregate demand, and causes some real GDP growth.
That growth creates jobs, and more workers earn income. That new income sparks greater consumer spending, which
drives aggregate demand even more, and causes additional real GDP growth.

Activity 4: TOK Is all demand created equally?

(a) Governments face a balancing act between the size and composition of economic output. While total demand,
often measured by GDP, is crucial for economic health, the types of goods and services.

(b) the question whether the administrative actors should tackle with a tax reduction or additional expenditures, both
not being the same, remains an open problem for an expansionary fiscal policy.
Efficiency: The additional spending will be geared towards sectors in which the Government is willing to produce
output. While the tax relief might concern more people thus making some spend the money, they gained instead
saving it, the immediate effect may still be low.

Speed: Tax cuts can be implemented more rapidly since they do not necessitate the extra spending programs to
establish. exclamation

If the new expenditure is to be carried out, the process may take longer as new initiatives or programs require
designing.

Political Feasibility: Tax cut can be a supporter of the electorate, making it easier to pass the legislature. The higher
could lead to more and more questions about the money location.

Current Economic Conditions: In the case of a recession the aim usually is people to start spending once again.
declaration/or if the consumers have got a greater cash reserve from the tax cuts, they ought to spend it, and thus fan
the economy.

At times, the government could even decide to inject funds in different parts of the economy such as roads or
environmentally friendly technology. Such a strategy is an easier and more direct way to achieve this aim.

In the end, what works best depends much on where the economy is, on the government, and the type of economy.

Activity 5: Can fiscal policy promote long term growth?

The short-term effects of expansive fiscal policy on demand are as follows.

Increase in government spending: this puts more money into the economy which raises demand for goods and
services.
Lower taxes: more income can be spent by consumers and businesses lowering their taxes which could lead to
increased spending or investment. Nonetheless, the consequences for supply at an aggregate level tend to be more
complicated in nature:

Short run: In the immediate future businesses may see higher production levels due to increased demand thus
resulting into some supply-side implications such as; Better use of available capacities by firms More employees being
recruited by companies

Long run: The long-term impact of AS depends on where government spends additional funds. If they are used for:
Infrastructure development; it may lead to improved efficiency in productivity hence raising potential long-run
aggregate supply (LRAS).

Education and training; this will help enhance skills among workers thereby elevating LRAS.

Activity 6: Link to the paper one assessment

(a) Governments can take different fiscal policy measures to dampen aggregate demand (AD) in an economy that is
experiencing inflation or overheating. Here are two primary methods:

1. Cutting Down on Government Spending:

This involves the government reducing its expenses. In other words, the amount of money circulating in the economy
decreases as there is a drop in government injection of funds.

For example, non-essential infrastructure projects may be delayed, or certain programs may have their funding
reduced by the government.

2. Tax Hiking:

The government takes more money from businesses and individuals by increasing taxes. Consequently, this leaves
them with less disposable income which they can spend thus reducing overall demand for goods and services.
Taxes can be increased either broadly or specifically. For instance, a government might impose higher income tax rates
or increase taxes on goods and services seen as non-essential.

(b) Demand-Side Policies and National Income: A Study of Success

The objective of demand-side policies is to stimulate economic activity by increasing aggregate demand (AD), which in
turn results in higher national income — the total value of goods and services produced within a country. Here is an
appraisal on how well they work with real-world examples:

Arguments For: -Short-Term Boost: Short-run increase in national income can be achieved through such demand-side
measures as increased government spending and tax cuts. For example, during the Great Recession (2007-2009),
many nations used stimulus packages involving more infrastructure investments and social welfare expenditures. This
prevented further decline in their economies while supporting domestic output.

Increased Consumption: Steps that leave people with extra cash like tax cuts could promote spending. This will create
more need for goods and services thereby encouraging producers who will then contribute towards national income
growth.

Arguments Against: - Long-Term Impact: The ability of demand side policies to foster sustainable development over
time may be questioned. More debt may be incurred if governments raise their expenditure levels too much, leading to
future economic difficulties. Furthermore, savings rather than extra spending can result from tax reductions because
individuals have different motives for earning money

Real-World Instances:
China’s Stimulus Package (2008): In response to the 2008 financial crisis, China executed a massive stimulus package
which included higher government spending on infrastructure projects; this kept the country out of recession and
ensured high levels of short-term economic growth but also led to a marked increase in debt.

US Tax Cuts (2017): The Tax Cuts and Jobs Act of 2017 in the United States lowered taxes for businesses as well as
individuals.
The immediate effect on national income was positive, showing some increase in the economic growth rate however its
long term consequences are being debated upon considering rising income inequality and possible future deficits.