2:5:2 Macroeconomic Objectives And Policies - Supply Side Policies

Question 1

What is meant by the term Supply Side Policies?

Answer 1

Are action taken by the government intended to increase the amount that firms are willing to supply at any given price level.

Question 2

What is the objective of Supply Side Policies?

Answer 2

• Improve the supply of the economy (productivity, availability of resources, removing regulations and just reducing cost in general) - Seek to shift AS to the right

Question 3

Which curve do Supply Side Policies effect?

Answer 3

Aggregate Supply Curve (AS)

Question 4

What are the 2 approaches to supply side policies?

Answer 4

• Effectiveness of markets ( allowing more flexibility as determined by supply and demand) - Interventionist Approach (Governments getting involved in markets to reduce market deficiencies)

Question 5

Why are Market Based Supply Side Policies effective?

Answer 5

• Increasing price Flexibility and Signalling In the Market (if Price is not used to allocate resources effectively, there will be surpluses and deficits in the market) - Increasing Competition (Increasing competitions means firms have to cut costs or become more innovative in order to survive) - Improving Incentives (Incentives function by giving people higher rewards for what they do and therefore motivating them to work harder)

Question 6

Why are Interventionist methods of Supply Side Policy Effective?

Answer 6

• Improving Education and Training ( Increase Spending in Education and using subsidies to incentivise firms to take on apprentices, however it’s expensive and time lags) - Improving health and introducing performance related pay (Long term policies that encourage firms to produce more at any given price level) - Implementing Regulations - Improving Infrastructure

Question 7

What is meant by the term infrastructure?

Answer 7

The physical and organisational framework need for an economy to operate efficiently

Question 8

Disadvantages of Supply Side Policies.

Answer 8

• If there is demand deficient unemployment then the supply side policies could have no affect at all - Time lags, Policies such as education can take many year to have an effect on production costs - No opportunity for increased competition

Question 9

In the short run how does Investment education affect production costs?

Answer 9

Because there are fewer people in the labour market

Question 10

How can Supply Side Policies cause Poverty and Inequality?

Answer 10

• By cutting out of work benefits such as Jobseekers Allowance when there are no jobs available or the persons skill set doesn’t match the job requirements, then there I wider income distribution and no effect on the labour market - Cuts In the National Minimum Wage - Reducing the power of trade unions

Question 11

What is meant by a trade union?

Answer 11

Organisations of workers that exist to promote the welfare of their members

Question 12

What side effects do Supply Side Policies have on the Demand Side?e

Answer 12

• Cutting taxes has fiscal policy implications - Cutting Minimum real wages & Reducing the power of trade unions affects low income earners disproportionality

Question 13

What effect does effective Supply Side Policies have on Inflation and Economic Growth?

Answer 13

Lowers inflation Higher rates of economic growth

Question 14

Demand Side Policies shift the [….] curve

Answer 14

Aggregate Demand (AD) curve

Question 15

Supply Side Policies are used to increase the […..] curve

Answer 15

Aggregate Supply (AS)

Question 16

What is the aim of Supply Side Policies on an economy?

Answer 16

Influence individuals and firms to become more productive, cutting costs, improving incentives and increasing competitiveness, thereby being able to produce more at lower prices

Question 17

What is meant by the term Free-Market Supply Side Policies?

Answer 17

Policies to increase competitiveness and competition

Question 18

What is meant by the term Interventionist Supply Side Policies?

Answer 18

Government intervention to overcome market failure

Question 19

How does Supply Side Policies Lower Inflation?

Answer 19

• Shifting AS level to the right will cause a lower price level - By making the economy more efficient, Supply-Side Policies will help reduce cost push inflation

Question 20

How do Supply-Side Policies cause Lower Unemployment?

Answer 20

• Help reduce structural, frictional and real wage unemployment.

Question 21

How does Supply-Side Policies improve economic growth?

Answer 21

• Increase Economic Growth By Increasing LRAS - Enables a higher rate of economic growth without causing inflation

Question 22

How do Supply-Side Policies improve trade and the Balance of Payments?

Answer 22

• By making firms more productive and competitive, they will be able to export more.

Question 23

Examples of Free Market Supply-Side Policies.

Answer 23

• Privatisation - Deregulation - Income Tax Cuts - Remove Red Tape - Flexible Labour Markets - Free-Trade agreements - Reduce Welfare Benefits

Question 24

Free market Supply-Side Policies - Privatisation

Answer 24

• Sell State owned assets to the private sector - Argued that the private sector is more efficient as they have a profit motive to reduce costs and develop better services

Question 25

Free market Supply-Side Policies - Deregulation

Answer 25

• Allow new firms to enter a market, will make the market more competitive - Open monopolies to competition - Competition tends to lower prices and better quality of goods/services

Question 26

Free market Supply-Side Policies - Income Tax Cuts

Answer 26

• Greater incentive to work longer hours - Leading to an increase in the labour supply and more output - Cut In corporation tax gives firms more Retained profits to use for investment

Question 27

Free market Supply-Side Policies - Remove Red Tape

Answer 27

• Make it easier to build new factories and housing - Will Reduce Firms Costs and encouraging investment

Question 28

What is meant by Red Tape?

Answer 28

• Excessive regulation that hinders an action

Question 29

Free market Supply-Side Policies - Flexible Labour Markets

Answer 29

• Reduce power of trade unions, minimum wages and regulations. - Enable zero hour contracts - Cheaper for firms to hire and fire workers, and encourages firms to take on workers in the first place

Question 30

Free market Supply-Side Policies - Free-Trade Agreements

Answer 30

• Reduce tariffs and other barriers to trade - Will Increase Trade and provide Firms with an incentive to export

Question 31

Free market Supply-Side Policies - Reduce Welfare Payments

Answer 31

• Increase incentive to get a job and to work longer hours

Question 32

Examples of Interventionist Supply-Side Policies.

Answer 32

• Public Sector Investment - Education - Vocational Training - Housing Supply - Health Spending

Question 33

Interventionist Supply-Side Policies - Public Sector Investment

Answer 33

• Invest in infrastructure, improve transport and reduce cost of transport for firms - With transport there is often a market failure (congestion and pollution) Government Spending on improving transport overcomes this market failure

Question 34

Interventionist Supply-Side Policies - Education

Answer 34

• Increase funding to schools and universities. - Improve Labour Productivity and Increase AS - Often there is under provision of labour in the free market, leading to market failure. Therefore the government may need to subsidise education and training schemes

Question 35

Diagram showing the effect of an increase in Aggregate Supply.

Answer 35

Question 36

Diagram of the Phillips Curve.

Answer 36