Why might expansionary demand side policies not always be effective in promoting economic growth?

Expansionary demand side policies focus on increasing Consumption and Investment within the economy. By increasing these components of real GDP, the economy will normally increase its' output and decrease its' levels of unemployment. However, this may not be an effective way of promoting economic growth if an economy is already very close to the full level of employment and output. If the economy is at YFE then an increase in Consumption and Investment will be purely inflationary and not increase the rate of economic growth in the country. The Keynesian model shows that these polices will only not be effective at promoting economic growth when the economy is at the full level of output (YFE). However the Neo-Classical model argues that demand side polices will always be ineffective, and that instead we should use expansionary supply side policies to increase to productive potential of the economy; causing an outward shift of the LRAS curve. Ultimately, expansionary demand side policies (under the Keynesian approach) will be effective when there is a deflationary gap, but not when we are operating at (YFE) . While Neo-Classical scholars will argue these policies will always be inefficient at promoting economic growth.

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Answered by Charlie H. Economics tutor

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