While demand-side policies primarily target short-term economic management, they can significantly influence an economy's long-term productive capacity. This influence operates through both fiscal and monetary policies.
NoteDemand-side policies can affect both aggregate demand and long-run aggregate supply through different types of policies.
Fiscal Policy
The most direct impact on long-run supply comes through government spending decisions in key areas.
Infrastructure Investment
- Public infrastructure spending creates lasting productive assets.
- Transport networks permanently reduce business operating costs.
- Communication infrastructure enhances long-term market efficiency.
- Public utilities support sustained industrial development.
Beyond physical infrastructure, fiscal policy also shapes human resources through targeted investments.
Human Capital Development
- Educational spending improves workforce skill levels permanently.
- Public healthcare investment enhances long-term labor productivity.
