2.6 Demand + supply-side policies Flashcards
what is the aim of supply-side policies?
aims to improve the long-run productive potential in an economy
what are the two types of supply-side policies?
market-based and interventionalist
what is a ‘market-based’ supply-side policy?
limits gov. intervention + allow free market to eliminate imbalances
what is an ‘interventionalist’ supply-side policy?
rely on the gov. intervening in the market
what are the market-based supply-side policies?
- to increase incentives
- to promote competition
- to reform the labour market
how can incentives be increased?
reducing income + corporate tax to encourage spending + investment; creates more willingness to work, quality of labour increases
what are the interventionalist supply-side policies?
- to improve skills and quality of the labour force
- to improve infrastructure
- reform labour market
- promote competitiveness
how can the gov. improve infrastructure?
could spend more on infrastructure such as improving roads + schools. Can reduce travel time, leading to reduced geographical immobility of labour
how can you show SSPs on an AS/AD diagram?
LRAS shifts to the right -> inc. productive potential -> max. output at full employment inc + price falls (used for both classical and Keynesian)
what are the strengths of SSPs?
ONLY policies which deal with structural unemployment; labour market can be directly improved with education + training
what are the weaknesses of SSPs?
- DDPs are better at dealing w/ cyclical unemployment, ⇒ reduce size of negative output gap + shift AD to the right
- SSPs can have significant time lags
- market based SSPs (e.g. reducing tax rates) can lead to more unequal distribution of wealth
how can the gov. improve skills + quality of the labour force?
spend more on education → improve skills + quality of the labour force + lowers costs as they train less workers; healthcare → reduces hours lost to ill health, INC. well-being, quality of workforce
how can gov. promote competition?
deregulating encourages new firms to enter the market; can help improve economic efficiency, as employees are more incentivised to work
what are the two types of demand-side policies and who operates them?
- fiscal -> run by the UK gov; focuses on taxation + gov. spending
- monetary -> run by the Bank of England (central bank); focuses on interest rates + money supply
what is the difference between a contractionary and expansionary policy?
contractionary - causes AD to fall
expansionary - causes AD to rise
how does a rise in interest rates reduce AD?
- INC. interest rates -> contractionary monetary policy
- this is because it inc. the cost of borrowing for firms and consumers -> leading to a fall in household consumption + investment
- more people are saving -> fall in demand for assets
- people become less confident -> consumer/business confidence dec. which are factors affecting consumption + investment
- foreigners more incentivised to hold their money in British
banks as there’s a high rate of return -> inc. demand for £ -> value for pound inc. -> SPICEE -> decreases net trade and
therefore AD falls
what are the issues with affecting interest rates to influence AD?
- a lack of confidence in the economy will prevent people from borrowing, even if interest rates are set very low
- sometimes interest rates are so low that they cannot be reduced further to stimulate demand
- high interedst rates over a long period of time will discourage investment + reduce LRAS
what is meant by ‘quantitative easing’?
when the Bank of England buys assets in exchange for money to inc. money supply and get money moving around the economy during times of very low demand
what are the problems with quantitative easing?
- ## if not controlled properly, it can lead to hyperinflation
