Policies to Promote Economic Growth (Cambridge (CIE) IGCSE Economics): Revision Note

Demand-side policies

• Demand-side policies aim to influence the total demand in an economy

• The two demand-side policies are fiscal policy and monetary policy

• Any policy that increases consumption, investment, government spending or net exports is likely to promote economic growth (cause an increase in real GDP)

Examples of fiscal policy used to promote growth

• Taxes on many imports (import tariffs) are eliminated

  • Costs of production for firms are reduced and they can produce more goods and services at lower prices - which will increase total demand

• Subsidies are provided to manufacturers of electric cars

  • Car manufacturers are able to produce their cars more cheaply and sell them at lower prices - which will increase total demand

• A government increases the level of unemployment benefits

  • Unemployed workers have more income available and increase their consumption – which will increase total demand

• A government creates a free port zone

  • Both multi-national and domestic companies are incentivised by the low- or no-tax promise and seek to invest in free port zones which will increase total demand

• A government announces that it will build 14 new schools in the next financial year

  • Building companies have to be employed and building materials consumed, which is all paid for by the government and will increase total demand

Examples of monetary policy used to promote growth

• The housing market is subdued and so the Central Bank lowers interest rates by 1%

  • With cheaper loans now available, house buyers demand more loans to purchase properties and to renovate and furnish properties - consumption increases and total demand increases

• The Central Bank intervenes in the exchange rate to depreciate it

  • The nation's currency is now cheaper for foreigners to purchase and this boosts exports, which will increase total demand

• The Central Bank commits to a new quantitative easing programme of $75bn a month

  • Commercial banks, firms and private investors receive this money as the government purchases their bonds

  • They use some of it to invest and consume resulting in greater total demand

The effectiveness of demand-side policies

• Demand-side policies are most effective when there are unused workers and factories

• They are less effective when the economy is already working at full capacity

Supply-side policies

• Supply-side policies aim to influence the total supply in an economy

Examples of supply-side policies to promote growth

• The government reduces the level of welfare benefits

  • People who rely on benefits for survival are more likely to make themselves available for work

  • With more workers in the economy there can be a higher level of output and economic growth

• The government launches a new 'Education and Training' fund to help fund university students studying artificial intelligence (AI)

  • This provides a pool of skilled labour in AI and helps to grow a new industry, resulting in greater national output and economic growth

• The government decides to remove quotas on all imports

  • The removal of this protection lowers prices and encourages more competition, leading to higher output and economic growth

• The government decides to build an additional  runway at the national airport

  • An additional runway means that more planes can land, which generates more economic activity (e.g., transport of goods) leading to higher output and economic growth

The effectiveness of supply-side policies

• Supply-side policies are better for solving long-term growth and unemployment problems

• They are less effective at quickly boosting growth during a recession because they take time to work