Rameshwar's IAS

Demand-Side Economics

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The hypothesis, demand-side economics, refers to the demand for goods and services, according to Keynesian economics, as the primary driver of economic activity and short-term fluctuations. This point of view is at odds with supply-side economics, also known as classical economic theory, which holds that the production of goods or services—also known as supply—is the primary factor in economic expansion. The theory of demand-side economics states that economic activity is driven by demand for goods and services. Aggregate demand is a central feature of demand-side economics. If individuals and businesses are unable to spend, governments may be able to create demand for goods and services.

During the 1930s' Great Depression, economist John Maynard Keynes developed his economic theories. In times of low economic activity, he believed that a government should increase spending to encourage subsequent spending by consumers and businesses. He maintained that there is insufficient demand for goods, which causes unemployment. The Great Depression saw factories shut down. Factory workers were not needed enough because there was not enough demand for the products. Contrary to conventional economic theories, the economy was unable to self-correct and regain equilibrium as a result of this lack of aggregate demand, which contributed to unemployment. The emphasis placed on aggregate demand is one of the fundamental features of demand-side economics, also known as Keynesian economics. There are four components that make up aggregate demand: consumption of services and goods; investment in capital goods by industry; government spending on open labor and products; and total exports. Keynes advocated government intervention to help overcome short-term low aggregate demand, such as during a recession or depression, according to the demand-side model. This could diminish joblessness and invigorate monetary development. The policies of the demand side economics will include:

Government spending - This is one type of demand-side economic policy that can help if the other parts of aggregate demand are static. The government can intervene if people are less able or willing to consume, and businesses are less likely to hire workers and invest in building more factories. It can drive demand for goods and services by increasing government spending. During a national recession, Keynesian economics advocates for substantial government spending to stimulate economic activity. The economy benefits more from putting more money in the pockets of the middle and lower classes than from wealthy people saving or hoarding it.

Increasing the Money Supply - Central banks can also accomplish this by adjusting interest rates or purchasing or selling bonds issued by the government. A component of monetary policy is this kind of intervention. The economy's total money supply or the rate at which money moves through it can be increased through these actions, such as raising interest rates. The velocity of money, or the frequency with which $1 is used to purchase domestically produced goods and services, rises in tandem with an increase in the flow of money. Because money moves at a faster rate, more people are buying and selling goods and services, which raises aggregate demand.

An illustration of a policy of the Demand-Side Economics - The 2008 financial crisis prompted the United States government to employ demand-side economic policies. Rates on loans were lowered by the Obama administration. Additionally, it reduced middle-class tax rates. It set up a $787 billion improvement bundle. In addition, the financial sector was overhauled by the government in a manner unprecedented since Franklin D. Roosevelt's time in office in the 1930s.

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