Active demand management policy attempts to use monetary and fiscal policy to reduce the variability of output growth around its medium-term trend path, while at the same time controlling the rate of inflation. Fiscal policy seeks to alter the levels of aggregate demand through decisions about the level of government revenue and expenditure. Monetary policy can be used to influence demand through control of the money supply, the availability of credit and the rate of interest. There is no general agreement about how unstable the economy would be if left to its own devices. The ‘new classical’ view is that market economies tend to operate in the region of full employment of both labour and capital, apart from relatively short periods, when, as the result of an exogenous shock, there may be transitory unemployment. However there are stabilizing mechanisms that tend to return the economy to full employment fairly quickly. The alternative ‘Keynesian’ view is that advanced economies are inherently unstable and may depart from full employment for long periods of time in the face of adverse shocks, or at least can take quite a long time to return to full employment, due to rigidities in goods and labour markets.
KeywordsExchange Rate Interest Rate Monetary Policy Fiscal Policy Full Employment
Unable to display preview. Download preview PDF.