Strengths & Weaknesses of Demand Side

Economics: Edexcel A A Level, topic 4.1.7

Strengths and Weaknesses of Demand-Side Policies

Demand side policies - fiscal and monetary - have various strengths and weaknesses.

Fiscal policy is the fastest acting of the three key types of economic policy.
Increased government spending and tax cuts can be felt by the economy almost immediately with real take home incomes rising as well as profits.
Fiscal policy can be targeted at particular parts of the economy which need the most help (e.g. targeting weaker regions or industries).
Expansionary fiscal policy leads to increased government and national debt which can be a tricky policy to take on if government debt is already high as it could lead to national bankruptcy.

Monetary policy requires no spending on behalf of the government.
It allows households and firms the freedom to choose what to do with the extra available money.
It is the medium term option and it can take up to 18 months for monetary improvement to lead to general economic improvement.
Expansionary monetary policy requires consumer and business confidence in order to work. When the bank rate was cut to 0.5% in the UK after the financial crisis, there was little change in AD as households and firms didn’t want to increase spending due to economic uncertainty.