Demand Management

Policies
Qazi Subhan
Introduction
There are three demand management policies
which are managing the Aggregate demand.
Main objectives of these policies are to stabilize
the economy if there is any trouble in the
economy.
First two policies are related to closed economy
and the last policy is concerned to open
economy. Policies are as follows.
Fiscal Policy ---------------Affects Product Market
Monetary Policy----------- Affects Money Market
Exchange Rate Policy-- Affects Product Market
Fiscal Policy
Definition

Objectives of Fiscal policy

Tools of Fiscal Policy

Kinds of Fiscal Policy

Application of tools of fiscal policy to
Economic situation.

Objectives of the D.M. Policy
Economic Growth

Price stability

Employment Opportunities

Definition
Fiscal Policy means that policy which is
formulated by the government to achieve its
objectives with the help of its tools.
Fiscal policy is concerned with government
purchases, taxes, federal budget, budget deficit
and transfer payments.
Tools Of Fiscal Policy
Government Expenditure
Taxes
Direct Tax
Indirect Tax
Types of Taxes
Direct Tax
Income Tax
Property tax
Wealth Tax
Indirect Tax
Sales tax
Value Added Tax
GST
Other Types of Tax
Progressive tax Proportionate tax
Regressive tax Digressive Tax
Advelorem tax Specific Tax
Compound Tax
Kinds of Fiscal Policy

Contractionary Fiscal Policy (Tax and G )

Expansionary Fiscal Policy (G and Tax )
Application of Fiscal Policy to the
Economy
Business Cycles

To Product Market

To Money Market

To Labor Market
General Equilibrium
Fiscal policy and Business Cycle
When the economy is in boom situation then
contractionary fiscal policy has been used.
Progressive tax has been used as an automatic
stabilizer of the economy.
When the economy is in recovery situation then
contractionary fiscal policy has also been used
but proportionate tax has been used to attain the
objectives of fiscal policy
In case of depression and recession,
expansionary fiscal policy has been used in
which government is increasing its development
expenditures.
Fiscal Policy and Product Market
Impact of Tax on Product Market
Consumption would come down
IS curve shift leftward
In IS-LM Model, rate of interest increase
and national income come down
AD shift leftward
In general equilibrium, Price increases
and national income would come down
Fiscal Policy and Product Market
Impact of G on Product Market
Government expenditure would increase
IS curve shift rightward
In IS-LM Model, rate of interest increase
and national income increase
AD shift rightward
In general equilibrium, Price increases
and national income would increase

Fiscal Policy and Money Market
Impact of Tax on Money Market
Real Money Balance would increase
LM curve shift to right ward which will cause
of a decrease in interest rate
In IS-LM Model, rate of interest decrease and
national income increase
No shift in AD but movement on AD.
In general equilibrium, No effect on GPL and
National Income due to Fiscal Policy.
.
Fiscal Policy and Money Market
Impact of G on Money Market
Money Demand would shift to right ward
There is no shift in LM curve but
movement would be occurred.
In IS-LM Model, no change.
No change in AD
In general equilibrium, No Effect on GPL
and National Income due to Fiscal
Policy.
Result: Fiscal Policy is ineffective in
Money Market
Fiscal Policy and Labor Market
Impact of G on Labor Market
As G increases increase in
Investment labor demand would
increase Labor demand would
shift to right Aggregate Supply
also Shift to right Price decreases
and National Income would increase.
Note: Tax has negative impact on
labor market Labor demand would
decrease
Monetary Policy
Definition

Objectives of Monetary policy

Tools of Monetary Policy

Kinds of Monetary Policy

Application of tools of Monetary policy to
Economic situation.

Definition
Monetary Policy is designed by State Bank
to stabilize the economy with the monetary
tools
Objectives
To improve the economic growth
To stabilize the prices
To increase employment opportunities
Tools of Monetary Policy
Tools of Monetary Policy
Bank Rate
The rate at which the State Bank is giving the loans to
Commercial Banks
Required Reserve Ratio (RRR)
Most powerful tool (seldom used)
Affects money creation by changing ER and the
multiplier.

Open Market Operation (OMO)
It evolved as the most effective tool of monetary
policy because of flexibility.
Securities can be bought or sold in large amounts
& their impact on reserves is very prompt.

Types of Monetary Policy
There are two types

Expansionary Monetary Policy
Bank Rate decrease
RRR decrease
Purchase of Public shares

Contractionary Monetary Policy

Bank Rate Increase
RRR Increase
Sale of Public shares
Application of Monetary Policy
Money Market

Product Market

Labor Market

Business Cycle