Supply side Economics:
Supply side Economics: Keynesians Aggregate demand management policy
influenced US policy nearly about four
decades and then it was challenged by the monetarists, the rational
expectationists, and supply-siders. Monetarists believe in appropriate control
over money supply will help foster the conditions necessary for the growth of a
healthy economy. In the short run changes in the stock of money are crucially
important in determining fluctuating real output and employment. In the long
run, however, the quantity of money can only influence nominal gross national
product (GNP). Real Income is affected by many of the same elements that supply
side, neo classical economists emphasise.
In 1970s a new group known as
Supply Side economists became popular. The supply-siders derived their name
from the importance they placed on aggregate supply (AS) in contrast to the
Keynesians who emphasised at least in the short-run on aggregate demand (AD).
The most famous supply-sider is Arthur
Laffer with became famous with his Laffer curve showing how a cut in tax rates can
increase the government’s revenue. Other leading economists in this school are
Paul Craig Roberts, Jack Kemp and Michael Boskin. Paul Craig Robert (1978)
believes higher tax cause work effort, savings and investment to decline.
Supply-siders believe that tax rate policies have important short-run effects
on natural output and aggregate supply. They believe that a rise in tax rate
may lower economic incentives to produce goods and services. In short, people
change their behaviour in response to changes in after tax wages and interest
rates. Thus, like Keynesians Supply-siders believe in the effectiveness of
fiscal policy but they emphasise the shift in natural output line and the
aggregate supply curve. Keynesians on
the other hand emphasise shift in aggregate demand curve to them the aggregate supply curve is
stationary. The chief policy proposal of the supply-siders is to lower the tax
rate to shift the aggregate supply curve and to lower the inflation. In
macroeconomics supply side economics has never been much popular put the tax
cut policies were tried in many countries for quite some time during 1970s. The
supply-siders believed that the effects of fiscal policy changes are quick and
substantial in magnitude. The lower tax rate will shift natural output and
aggregate supply curve to the right with little or no effect on aggregate
demand curve. As a result of this shift in the As curve the inflation will be
lower with higher real output.
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