Final answer:
Demand management policies are government measures to regulate economic activity and manage aggregate demand, aiming at stability, full employment, and growth. They include both monetary policy (money supply and interest rates) and fiscal policy (government spending and taxation). These policies address issues like unemployment, inflation, and trade imbalances by influencing consumption, investment, and overall economic demand.
Step-by-step explanation:
'Demand management policies' are measures implemented by governments to influence the level of economic activity and manage aggregate demand within an economy, with the aim of achieving macroeconomic objectives such as price stability, full employment, and sustainable economic growth. These policies can be broadly categorized into monetary policy and fiscal policy. Monetary policy, managed by a central bank, involves adjustments to the money supply and interest rates to regulate economic activity. Contractionary monetary policy is typically used to counteract inflation by reducing the money supply and increasing interest rates. Fiscal policy involves changes in government spending and taxation to influence aggregate demand; expansionary fiscal policy aims to increase demand through higher government spending or tax cuts, while contractionary fiscal policy seeks to reduce demand through lower spending or higher taxes.
For example, during a recession, a government might implement an expansionary fiscal policy by increasing its spending or cutting taxes to boost consumption and investment, thereby raising demand and aiming to decrease unemployment. Alternatively, to curb inflation, a central bank may opt for a contractionary monetary policy by raising interest rates, aiming to decrease borrowing and reduce spending.