Measures the increase in the general price level of goods and services in an economy, over a specific time period.

Refers to how unevenly income is distributed throughout a population. The less equal the distribution, the greater the income inequality. 

5.5% (2021) + to 4.1% (2022) + 3.2% (2023) / 3 = 4.27%.

6.3% (2021) + 4.6% 2022 + 4.4% (2023) / 3 = 5.1%.

A developing nation is one with a low level of national income and development, as measured by the human development index (HDI). An emerging economy, is a type of developing nation that is becoming more engaged with global markets as it grows and posses some, but not all, of the characteristics of developed nations.

As the diagram illustrates national income (world) in 2021 is represented by Y2, where AD (2021) intercepts with the LRAS curve. Without the unexpected slowdown in the global economy then real GDP would have likely been at Y1 but settled at the lower growth level of Yfe.

The impact on emerging and developing economies of 'persistent supply-chain bottlenecks' has created cost-push inflation as a result of rising production costs, shown on thw diagram by a rise in average prices from PL1 to Pl2 and a fall in national income from Y1 to Y2.

The impact of constraining (contractionary) monetary policy on global economic growth can be shown by the following diagram, with a recessionary gap (or at the very least lower economic growth) resulting from the fall in aggregate demand, as higher interest rates reduce the spending power of businesses and individuals, reducing the level of spending and investment in the economy. 

Lines 54-55 of the text suggest that the covid pandemic has worsened the level of income inequality in world economies, raising the gap between the wealthiest and poorest households, shown by a right shift from Lorenz curve A to Lorenz curve B and a higher gini-coefficient.

Economic growth can be described as an increase in real gross domestic product, while fiscal and monetary policies aim to manipulate the aggregate demand curve.  [Key terms identified].  

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation and economic growth.  Monetary policy includes the Central Bank using changes in the money supply or interest rates to affect AD.  [Key terms identified].  

Governments can use expansionary demand-side policies to increase the level of national income / economic growth by increasing one or more of either C, G, I or X.  [Application]. 

This is shown by diagram one representing a right shift in AD as a result of expansionary fiscal or monetary policy.   As a result of the rise in aggregate demand from AD1 to AD2 real GDP rises also from Y1 to Y2.  [Application and explanation of diagram 1]. This may well be a crucial element of any government's attempt to grow their economies as ''global growth is expected to decelerate markedly ...... as pent-up demand dissipates and as fiscal and monetary support is unwound across the world'. (lines 3-7) [Reference to the text]. 

So how would a government use expansionary demand-side policy to increase aggregate demand?  The first of these could be the use of fiscal policy, meaning lower taxation or increased government spending levels.  [Application].  

According to British economist John Maynard Keynes (1883-1946) economic recessions or sluggish economic growth are primarily due to a deficiency in the consumer spending and business investment components of aggregate demand.  Therefore, given the output gap between AD levels and required AD level, shown on diagram 1 by the gap between Y1 and Y3, governments must fill this gap by either higher rates of government spending or encouraging private consumption through reductions in income tax.  Keynes believed that government spending was the more effective of the two as it reduced the possibility of money being either saved or spent on imports.  By doing this the government could close the gap, as shown by the rise in aggregate demand from AD1 to AD2.  [Application]. Lines 7-12 of the text identifies that 'deceleration in major economies—including the United States and China—will weigh on external demand in emerging and developing economies', necessitating the requirement for governments to focus on supporting private consumption, government spending and domestic investment, given the negative contribution made to real GDP from net exports. [Application]. 

In the case of emerging markets and developing economies, dependent on commodity exports, the opportunities presented may well be greater as they may benefit from a jump in global commodity prices as economies open up. Many suffered disproportionately 'over the past two years, when commodity prices collapsed with the arrival of COVID-19'. (lines 45-49). As economies opened up commodity prices 'then surged, in some cases to all time-highs last year.' (lines 45-49) [Use of the passage].  

Once governments have closed the output gap Keynes believed that the remainder could be filled by rises in consumption and investment that would naturally occur as a result of the initial spur in economic activity.  He described this process as the 'multiplier', which can be calculated as the multiple by which any initial fiscal stimulus would be likely to be multiplied by.  [Analysis].  

The passage suggests that fiscal stimulus measures (where funds are available) might be focused on tackling the issues created by 'increased inequality....... the availability of vaccines...... and access to education and health care' (line 55-56) as the effects of lock downs had a disproportionate impact on 'women and low-skilled and informal workers, as well as losses to human capital caused by disruptions in education. (lines 57-58). [Application to the passage]. 

More contemporary Keynesian economists have also championed the use of monetary policy to correct a recessionary gap, by expansion of the money supply through reduced interest rates and / or quantitative easing.  This is used to stimulate the economy by reducing the cost of borrowing, which in turn encourages private consumption and investment. [Application]. Diagram two shows expansionary monetary policy working.  By increasing the supply of money, via the electronic printing of money (quantitative easing) the government can reduce the minimum lending rate, which then filters down through the economy into cheaper loans and mortgages, encouraging private consumption and private investment.  [Analysis and diagram two explained]. 

Governments scope to use expansionary monetary policy, however, may be more open to question.  Lines 28-29 of the text highlights the challenges faced by 'Globally and in advanced economies, inflation is running at the highest rates since 2008', forcing many governments to employ 'constraining monetary policy'.  This suggests that throughout 2022-2023 more governments are using monetary policy to deliberately constrain the quantity of money, limiting the scope of governments to use monetary policy to grow the economy. [Real world example].  

There are also considerable disadvantages of governments using demand-side policies to stimulate economic growth. While few would argue that demand side policies can be effective in arresting recession, at least temporarily, economists are less convinced of their effectiveness over the long term.  [Application and alternative theory addressed].  

One of the criticisms of the use of expansionary demand side policy is the risk of 'crowding out', which describes the process where by increases in public spending and investment crowds out private.  [Application].  

This is based on the supply of and demand for money. According to the theory, any rise in government spending must also involve raising taxes or additional borrowing.  Both actions will reduce private spending and investment by either reducing individuals disposable incomes (in the case of higher taxes) or results in higher interest rates as government's demand for debt in open market operations drives up the demand for money.   The sheer scale of government borrowing can lead to substantial rises in the real interest rate, absorbing the economy's lending capacity and discourage businesses from making capital investments.  [Analysis and alternative theory addressed].  

With many nations finding that 'covid-19 pushed total global debt to the highest level in half a century' (line 35) a number of developing nations, perhaps even developed nations may simply find it impossible to raise additional borrowing, without interest rates rising prohibitively, as the UK learnt to its cost when it tried to seek additional (unfunded) finance from international markets and found the cost to high and quickly changed tact. [Real world example].

A second criticism of the policy, from a long term perspective, is that it can only really be effective when their is spare capacity in the economy, i.e. an output gap to fill.  Without available unemployed resources any rise in aggregate demand is likely to be inflationary only.  [Analysis].  This is shown on diagram three.  When the economy is in recession at point A, demand side policies can easily raise the level of GDP, but as the level of aggregate demand reaches point B, the availability of unemployed land, labour, capital and entrepreneurship diminishes.  Therefore greater demand levels (without the available resources to satisfy demand) will simply increase average price levels.  [Application and third diagram explained]. 

That said, in defence of opponents of this second criticism, unlike in developed nations, there is likely to be much lower levels of 'crowding out' in developing and emerging nations given that there is always likely to be spare capacity given the lack of economic activity and infrastructure present in those nations.  [Analysis].

In conclusion, therefore, the advantages of demand side policies are the fact that they are relatively straightforward to implement (compared to supply side policies) and are relatively effective in the short term, providing their is spare capacity in the economy.  However, they do little to improve long term growth in the economy, which is best served by the implementation of supply side policies, which have the ability to improve the quantity and / or quality of the available factors of production.  [Summary conclusion].