Demand Management Demand Management PoliciesPolicies

Qazi SubhanQazi Subhan

IntroductionIntroductionThere are three demand management policies There are three demand management policies which are managing the Aggregate demand.which are managing the Aggregate demand.Main objectives of these policies are to stabilize the Main objectives of these policies are to stabilize the economy if there is any trouble in the economy. economy if there is any trouble in the economy. First two policies are related to closed economy First two policies are related to closed economy and the last policy is concerned to open economy. and the last policy is concerned to open economy. Policies are as follows.Policies are as follows.

Fiscal Policy Fiscal Policy ------------------------------Affects Product MarketAffects Product Market

Monetary Policy----------- Monetary Policy----------- Affects Money MarketAffects Money Market

Exchange Rate Policy-- Exchange Rate Policy-- Affects Product Market Affects Product Market

Fiscal PolicyFiscal PolicyDefinitionDefinition

Objectives of Fiscal policyObjectives of Fiscal policy

Tools of Fiscal PolicyTools of Fiscal Policy

Kinds of Fiscal PolicyKinds of Fiscal Policy

Application of tools of fiscal policy to Application of tools of fiscal policy to Economic situation. Economic situation.

Objectives of the D.M. PolicyObjectives of the D.M. PolicyEconomic GrowthEconomic Growth

Price stabilityPrice stability

Employment OpportunitiesEmployment Opportunities

DefinitionDefinitionFiscal Policy means that policy which is Fiscal Policy means that policy which is formulated by the government to achieve its formulated by the government to achieve its objectives with the help of its tools.objectives with the help of its tools.Fiscal policy is concerned with government Fiscal policy is concerned with government purchases, taxes, federal budget, budget deficit purchases, taxes, federal budget, budget deficit and transfer payments.and transfer payments.

Tools Of Fiscal PolicyTools Of Fiscal Policy

Government ExpenditureGovernment Expenditure TaxesTaxes

Direct Tax Direct Tax Indirect TaxIndirect Tax

Types of TaxesTypes of Taxes

Direct TaxDirect Tax Income TaxIncome Tax Property taxProperty tax Wealth TaxWealth Tax

Indirect TaxIndirect Tax Sales taxSales tax Value Added TaxValue Added Tax GSTGST

Other Types of Tax•Progressive tax Proportionate tax

•Regressive tax Digressive Tax

•Advelorem tax Specific Tax

•Compound Tax

Kinds of Fiscal Policy Kinds of Fiscal Policy

Contractionary Fiscal Policy (Tax and G )Contractionary Fiscal Policy (Tax and G ) Expansionary Fiscal Policy (G and Tax )Expansionary Fiscal Policy (G and Tax )

Application of Fiscal Policy to the Application of Fiscal Policy to the EconomyEconomy

Business CyclesBusiness Cycles

To Product MarketTo Product Market

To Money MarketTo Money Market

To Labor MarketTo Labor MarketGeneral EquilibriumGeneral Equilibrium

Fiscal policy and Business CycleFiscal policy and Business CycleWhen the economy is in When the economy is in boomboom situation then situation then contractionary fiscal policy has been used. contractionary fiscal policy has been used. Progressive tax has been used as an automatic Progressive tax has been used as an automatic stabilizer of the economy. stabilizer of the economy. When the economy is in When the economy is in recoveryrecovery situation then situation then contractionary fiscal policy has also been used contractionary fiscal policy has also been used but proportionate tax has been used to attain the but proportionate tax has been used to attain the objectives of fiscal policyobjectives of fiscal policyIn case of In case of depression and recessiondepression and recession, , expansionary fiscal policy has been used in expansionary fiscal policy has been used in which government is increasing its development which government is increasing its development expenditures.expenditures.

Fiscal Policy and Product MarketFiscal Policy and Product MarketImpact of Tax on Product Market Impact of Tax on Product Market Consumption would come downConsumption would come down IS curve shift leftward IS curve shift leftward In IS-LM Model, rate of interest increase In IS-LM Model, rate of interest increase

and national income come down and national income come down AD shift leftwardAD shift leftward In general equilibrium, Price increases In general equilibrium, Price increases

and national income would come downand national income would come down

Fiscal Policy and Product MarketFiscal Policy and Product Market

Impact of G on Product Market Impact of G on Product Market Government expenditure would increase Government expenditure would increase IS curve shift rightward IS curve shift rightward In IS-LM Model, rate of interest increase In IS-LM Model, rate of interest increase

and national income increaseand national income increase AD shift rightwardAD shift rightward In general equilibrium, Price increases In general equilibrium, Price increases

and national income would increase and national income would increase

Fiscal Policy and Money MarketFiscal Policy and Money Market

Impact of Tax on Money Market Impact of Tax on Money Market Real Money Balance would increaseReal Money Balance would increase LM curve shift to right ward which will cause LM curve shift to right ward which will cause

of a decrease in interest rate of a decrease in interest rate In IS-LM Model, rate of interest decrease and In IS-LM Model, rate of interest decrease and

national income increasenational income increase No shift in AD but movement on AD. No shift in AD but movement on AD. In general equilibrium, No effect on GPL and In general equilibrium, No effect on GPL and

National Income due to Fiscal Policy. National Income due to Fiscal Policy. ..

Fiscal Policy and Money MarketFiscal Policy and Money MarketImpact of G on Money Market Impact of G on Money Market Money Demand would shift to right wardMoney Demand would shift to right ward There is no shift in LM curve but There is no shift in LM curve but

movement would be occurred.movement would be occurred. In IS-LM Model, no change.In IS-LM Model, no change. No change in AD No change in AD In general equilibrium, No Effect on GPL In general equilibrium, No Effect on GPL

and National Income due to Fiscal and National Income due to Fiscal Policy. Policy.

Result: Fiscal Policy is ineffective in Result: Fiscal Policy is ineffective in Money MarketMoney Market

Fiscal Policy and Labor MarketFiscal Policy and Labor Market

Impact of G on Labor MarketImpact of G on Labor Market As G increases As G increases ► increase in ► increase in

Investment ► labor demand would Investment ► labor demand would increase ► Labor demand would increase ► Labor demand would shift to right ► Aggregate Supply shift to right ► Aggregate Supply also Shift to right ► Price decreases also Shift to right ► Price decreases and National Income would increase.and National Income would increase.

Note: Tax has negative impact on Note: Tax has negative impact on labor market ► Labor demand would labor market ► Labor demand would decreasedecrease

Monetary PolicyMonetary PolicyDefinitionDefinition

Objectives of Monetary policyObjectives of Monetary policy

Tools of Monetary PolicyTools of Monetary Policy

Kinds of Monetary PolicyKinds of Monetary Policy

Application of tools of Monetary policy to Application of tools of Monetary policy to Economic situation. Economic situation.

DefinitionDefinitionMonetary Policy is designed by State Bank Monetary Policy is designed by State Bank

to stabilize the economy with the monetary to stabilize the economy with the monetary toolstools

ObjectivesObjectives• To improve the economic growth To improve the economic growth • To stabilize the prices To stabilize the prices • To increase employment To increase employment

opportunities opportunities

Tools of Monetary PolicyTools of Monetary Policy

Tools of Monetary Policy Tools of Monetary Policy Bank Rate Bank Rate The rate at which the State Bank is giving the loans to The rate at which the State Bank is giving the loans to

Commercial Banks Commercial Banks Required Reserve Ratio (RRR)Required Reserve Ratio (RRR) Most powerful tool (seldom used) Affects money creation by changing ER and the

multiplier.

Open Market Operation (OMO)Open Market Operation (OMO) It evolved as the most effectivemost effective tool of monetary

policy because of flexibilityflexibility. Securities can be bought or sold in large amounts

& their impact on reserves is very prompt.

Types of Monetary PolicyTypes of Monetary PolicyThere are two types There are two types

Expansionary Monetary PolicyExpansionary Monetary PolicyBank Rate decreaseBank Rate decreaseRRR decrease RRR decrease Purchase of Public shares Purchase of Public shares

Contractionary Monetary PolicyContractionary Monetary Policy

Bank Rate IncreaseBank Rate IncreaseRRR IncreaseRRR IncreaseSale of Public shares Sale of Public shares

Application of Monetary Policy Application of Monetary Policy Money Market Money Market

Product MarketProduct Market

Labor MarketLabor Market

Business CycleBusiness Cycle