2.5.2 Supply-side policies

Question 1

supply side policy definition

Answer 1

deliberate actions taken by gov designed to increase LAS of economy (right shift)

Question 2

effects of supply side polciies (4)

Answer 2

• increased GDP
• lower unemployment
• lower inflation
• improvememts to CA balence

Question 2

difference between supply-side polciies and improvements

Answer 2

improvements = firms themselves have desire to increase output - if possible

Question 2

effects of supply side polciies

increased GDP

Answer 2

increased capacity = higher GDP

Question 3

effects of supply side polciies

lower unemployment

Answer 3

• lower income tax
• reduced welfare benefits
• deregulation of markets
• imrpovements in education
• investment in infastructure
  = all lower it

Question 4

effects of supply side polciies

lower inflation

Answer 4

higher capacity = AD increase before capacity reached - demand-pull pressures won’t emerge until higher GDP level reached.

Question 5

effects of supply side polciies

improvements to CA balence

Answer 5

• downward pressure on prices = UK exports more price competative
• more productive workforce = lower-priced uk-output

Question 6

free-market supply side policy definition

Answer 6

= involves removing barriers that prevent market reaching most efficient equilibrum + allow market to work as freely as possible

Question 7

free-market supply side polciies:

Answer 7

1. income tax cuts and personal incentives.
2. reduction in trade union power
3. minimum wage
4. reduction in umemploymet benefits
5. reduction in labour protection
6. zero-hour contracts
7. privatisation

Question 8

free-market supply side polcies

income tax cuts and personal incentives

Answer 8

tax cuts = increased incentives
Laffer curve
therefore increase LRAS as reduces frictional and volentary unemployment.

Question 9

free-market supply side polcies

reduction in trade union power

Answer 9

TU use threat of industrial action to increase wage rate higher than free market rate
This pressure and higher cost for firms reduces firms demand for labor = lower employment.

Question 10

free-market supply side polcies

minimum wage

Answer 10

• increases over years may reduce quantity of labour demanded by businesses - policy = reduce or abandon it.
• minimum wage = reduces frictional + volentary unemployment as makes working more worthwhile.

Question 11

free-market supply side polcies

reduction in unemployment benefits

Answer 11

makes being unemployed less desireable.
can add to greater levels of pverty and more unequal distribution of income.

Question 12

free-market supply side polcies

zero-hour contracts

Answer 12

may seem insecure but makes it easier for firms to hire workers only when required.

Question 13

free-market supply side polcies

privatisation

Answer 13

• theory = moving businesses into private sector increases efficiency as priv businesses pursue max profit.
• often coupled with deregualtion to increase consumption = lower prices + higher output, AS shifts right

Question 14

interventionist supply-side policies definition

Answer 14

designed to increase AS by intervening in more markets - often accomanied by higher targetted gov expenditure.

Question 15

interventionist supply-side polcies: (6)

Answer 15

• education
• training
• industrial policy
• R+D subsides
• infastructure
• entrepreneurship

Question 16

interventionist supply-side polcies

education

Answer 16

reform and greater investment = increase AS due to:
* giving workforce greater set of skills, reducing occupational mobility therefore structrual unemployment.
* increasing quality = increased productivity = increase LRAS

Question 17

interventionist supply-side polcies

training

Answer 17

increasing quality and quality = increase AS
by: training schemes from gov or subsidies by gov.

Question 18

interventionist supply-side polcies

industrial policy

Answer 18

focus of changes in legislation affecting the labour market + changing laws in terms of grants given, tax breaks to encourage I, tax and regs.

Question 19

interventionist supply-side polcies

R+D subsidies

Answer 19

= make breakthroughs that lead to improved productive techniques or tech advances = increase LRAS
done by grants to research institutes.

Question 20

interventionist supply-side polcies

infastructure

Answer 20

Invest in it, to make ot easier for businesses to operate.
e.g. high speed railways between London and Scotland - easier for business to be conducted throughout UK.

Question 21

interventionist supply-side polcies

entrepreneurship

Answer 21

• make it easier for people to set up their own business or offer assistance to these.
• reduce ‘red tape’ = fewer administrative + legal burdens to encourage this.

Question 22

what would a successful supply side policy implementation do to the natural rate of unemployment?

Answer 22

reduce it

Question 23

factors that lead to fall in natural rate of unemployment:

Answer 23

• education improvements
• incentives to increase training
• higher investment
• lower income tax
• less benefits
• subsidising r+D

Question 24

What does a lower rate of natural umemployment mean?

Answer 24

means national income can be increased + AD can be increased to higher levels w/ less risk of inflationairy measures emerging.

Question 25

Limitations of supply side policies:

Answer 25

• Tax cuts often favour those with high incomes (e.g. top rate UK from 50% to 45%).
• Cutting benefits is more likely to increase poverty
• Reducing the rights of workers may prove unpopular with workers, who make up three-quarters of those of working age.
• time lag for significant effects
• The results of their implementation are not easy to measure.
• They can be very expensive.