Effects of Demand- and Supply-Side Policies

While supply-side policies are aimed at stimulating supply (AS, SRAS, and LRAS), it may also have effects on demand. Likewise, fiscal and monetary policies, which target demand (AD) may also have effects on supply.

Demand-Side Effects of Supply-Side Policies

• Interventionist supply-side policies involve government spending, which is a component of aggregate demand. Such policies will therefore boost AD to some extent even though the main desired outcome was AS.

• Market-based supply-side policies include tax cuts on both households and businesses, which will increase their disposable incomes/profits. This will result in more consumption and investment, boosting AD. 

Supply-Side Effects of Demand-Side Policies

• Some demand-side policies such as lowering taxes overlap with supply-side policies because they affect both supply and demand. 

• Raising interest rates as part of monetary policy will increase the cost of investment, which will hamper the long-run aggregate supply.