Disadvantages Of Demand-Side Policy

If the government thinks demand-side policy can lower unemployment it will only be effective for cyclical unemployment because it can close a deflationary gap. It will not be effective for natural unemployment because even when the economy is at full unemployment there will still be natural unemployment and demand-side policy can only bring the economy to full employment. Furthermore, natural unemployment is caused by supply-side factors. The way to lower natural unemployment is by supply-side policies.

An advantage of fiscal policy would be the multiplier effect. Multiplier effect refers to that when a government increases its spending, households and firms will receive that spending and re-spend that income. This leads to multiple routes of spending. In the end the net increase in AD is greater than the initial increase in government spending. Therefore, a small increase in government spending may be enough to
stimulate the economy. Second advantage would be the supply-side effect. A lot of times with fiscal policy if the spending for example on improving infrastructure, healthcare or education, these things can be argued to have supply-side effects. Which means increasing the long run aggregate supply. Furthermore, it improves the quality or quantity of the factors of production. It will also lead to long-term economic growth as LRAS increases. The article also states that: “More money will be spent on public services to improve livelihoods and steady the economy”. This is another advantage.

A disadvantage would be crowding out.
Which is referring to the fact that when a government increases spending it may run into a bunch of deficit. It needs to borrow, and when the government borrows it will lead to a higher demand for loanable funds and therefore a higher interest rate. This in the end lowers consumption and investment. Second disadvantage would be that it might be hard to fine-tune. Fine-tuning involves maintaining a steady rate of economic growth through fiscal policy. You can argue that it’s hard to estimate the size of the multiplier, because of how much the aggregate demand changes, depends on the multiplier. If the multiplier is big the government spending will magnify by more. Therefore it’s hard to estimate how much AD will increase, it’s hard for the government to fine-tune to meet its macroeconomic objectives. A third disadvantage would be that it affects government budgets. This is because fiscal policy refers to any uses of the government budget to affect the economy. Which include levied taxes and government
spending.