Answer to Question #88396 in Economics of Enterprise for PENNY

Question

Expansionary demand management policy measures tend to....

Answer 1

Expansionary demand management policy measures tend to increase the level of aggregate demand through the prudent use of expansionary fiscal policy and expansionary monetary policy measures. Such management policy is categorically used at the times of recession accompanied by very low levels of aggregate demand. At such times, the central government takes the demand management policy which expands the aggregate demand and this way the pace of growth is accelerated.

The expansionary fiscal policy measures are aimed at expanding demand through tax cut and increasing government expenditure, decreased taxes raises level of disposable income and increased government expenditure increases demand through multiplier and accelerator effect. Thus, recessionary pressures are eased.

The expansionary monetary policy measures are used to influencing the money supply in the economy through buying in open market operations, decreasing bank rates and decreasing the cash reserve requirements. This in turn, causes interest rate level to fall and boosts investments which expands aggregate demand through multiplier effect and problems of recession and unemployment are tackled.

For policy measures to be effective, fiscal policy measures should be accompanied by monetary policy measures, otherwise the effects may remain unrealized and the purpose of expansion of demand will remain unserved.