Gurjit Chahal
Econ 1A
Demiray
18 January 2015
Keynesian vs. Supply-side
The fiscal policy is the means in which a government adjusts how they spend and tax rates to
monitor the nation’s economy. Before the great depression the government was taking a ‘laissez-faire”
approach to the economy. But realized they needed to take a more proactive role in the economy to
regulate unemployment, inflation, etc. By mixing monetary and fiscal policies, governments are now
able to better control the economy. The fiscal policy is based on the theories of John Maynard Keynes.
The basics is that governments can influence macroeconomic productivity by increasing or decreasing
public spending and tax levels. This influence can curb inflation, increase employment and maintain
healthy money values. The idea is to find the balance between public spending and tax rates. The
supply-side Fiscal Policy is intended to increase an economy’s productivity by shifting aggregate
supply. For example, tax cuts giving businesses an incentive to invest and expand. This policy proposed
by Ronald Raegan, is in contrast to Keynes Fiscal Policy. The biggest distinction is that Keynisans
believe that their demand for goods are key economic drivers. But a supply-sider believes that
producers and their willingness to create goods set pace of economic growth. Supply-side believes that
supply creates its own demand.
In 1980 Raegan announced a recipe to fix the economic mess, the media referred to it as
Raeganomics. Later his theory became Supply-side or trickle down economics. Raegan proposed a
30% tax cut for the first three years of his presidency. He concentrated at the upper income levels. His