Demand Side Policies
                     
INTRODUCTION
• Demand Side Policies are attempts to increase 
or decrease aggregate demand to affect 
output, employment, and inflation. Demand 
Side Policies can be classified into fiscal policy 
and monetary policy.
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Aim of demand-side 
policies
• In general, demand-side policies aim to change 
the aggregate demand in the economy. 
Aggregate Demand is made up of Consumer 
Spending + Government Spending + 
Investment + Net Exports (exports-imports).
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For short-term changes
• We tend to use demand-side policies for short-
term changes – if inflation is getting too high, 
we can increase interest rates to cool the 
economy down.
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Expansionary or 
contractionary
• Demand-side policies may be expansionary or 
contractionary. Expansionary policies are 
intended to stimulate spending in a 
recessionary economy; contractionary policies 
designed to reduce expenditures in an 
inflationary economy.
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Monetary Policy
• Monetary policy involves the country’s central 
bank controlling the interest rate and money 
supply. Monetary policy affects Aggregate 
Demand (AD). 
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Fiscal Policy
• Fiscal expansions tend to be politically popular 
(i.e., more spending and/or less taxes) and thus 
easier to execute. However, fiscal expansions 
can make existing deficits worse and add to 
the national debt, which may not be 
sustainable.
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Demand-side fiscal 
policy 
• Another typical demand-side fiscal policy is to 
promote government spending on public works 
or infrastructure projects. The key idea here is 
that during a recession it’s more important for 
the government to stimulate economic growth 
than it is for the government to take in 
revenue. 
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What Is Demand-Side 
Economics?
• Demand-side theory directly counters classical 
and supply-side economics, which hold that 
demand is driven by available supply. This may 
seem like a chicken-and-egg distinction, but it 
has some major ramifications for how you look 
at the economy and the government’s role in 
it.
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Differences Between 
Supply-Side and 
Demand-Side 
Economics
• Demand-side economists argue that instead of 
focusing on producers, as supply-side 
economists want to, the focus should be on the 
people who buy goods and services, who are 
far more numerous.
• Demand-side economists like Keynes argue 
that when demand weakens—as it does during 
a recession—the government has to step in to 
stimulate growth.
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History of Demand-Side 
Economics
• The dominance of classical economic theory 
was severely challenged during the Great 
Depression when a collapse in demand failed 
to result in increased savings or lower interest 
rates that might stimulate investment 
spending and stabilize demand.
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