Discuss how demand-side policies and supply-side policies can be used to stimulate economic growth - Essay Example

Literature has shown both the policies have relative influence on economic growth (Ajisaf and Folorunso, 2002). The purpose of this paper is to analyze the impact of monetary and fiscal policies on economic growth. Various studies reveal while money supply has a positive impact on economic growth performance, the choice of inflation rate has no substantial impact on economic growth performance or GDP growth rates. This paper also highlights the implications of the great recession of 2008-2009 on microeconomic theory and policy.

In general, both fiscal and monetary policies look for attaining relative macroeconomic stability by maintaining stable prices and ensuring controlled inflation. Various studies show that that monetary policy alone is not capable enough to control inflation, and therefore, it should be supported by other fiscal, non monetary and non fiscal measures. Fiscal measures are extremely efficacious to control government expenditure, public and private investment, and personal consumption expenditure.

Policies for taxation and public spending are formulated and implemented by governments all over the world. These policies have been the central point of economic and political debates, and can have greater influences on economic growth. Having existed for long time, the debatable topic in economic theory, research and economic policy-making is the effect of fiscal policy on economic growth. Economists mention fiscal policy as being an important determinant for growth. The population and technological progress are exogenous factors which drive steady rate growth in the neoclassical model.

The growth rate can be affected by fiscal policy in transition to steady state (Esterly and Rebelo, 1993). Price stability is maintained by the central bank by controlling money supply in an economy. The money supply measure comes under monetary policy and this is the way through which