2.6 - Macroeconomic objectives and policies - SUPPLY-SIDE

Question 1

What are the 2 types of supply-side policy?

Answer 1

Market-based - little government action markets left alone
Interventionist - government takes more direct action

Question 2

Strengths of supply-side policy

Answer 2

• can reduce inflation
• create more jobs
• lead to an increase in international competition

Question 3

Weaknesses of supply-side policy

Answer 3

• longer - time lags
• large opportunity cost
• slow and inaccurate data collections leads to incorrect decisions

Question 4

1) Improving productivity of factors

Answer 4

• incentives
• competition
• mobility
• education
• Performance Related Pay (PRP)
• local pay

Question 5

Incentives

Answer 5

E.g: lowering income tax -> unemployed workers will join the market, and existing workers will work harder. However, people might also retire earlier and work less.

Question 6

Competition

Answer 6

More competition in labour markets through removal of restrictive practices and market rigidities. These benefit the employer, but not workers rights.

Question 7

Mobility

Answer 7

Improve labour mobility - move easily between jobs. This will have a positive effect on productivity and supply-side performance.
- education/training
- remove obstacles (pensions)
- increase information about jobs and incentives to move
- subsidies (not supply side?)

Question 8

Education

Answer 8

Increase education and training leads to an increase in human capital development to improve skills, flexibility and mobility. Government can spend money on firms or alter school curriculum. However, time lags, increase supply of teachers, increase cost on wages etc

Question 9

Performance Related Pay (PRP)

Answer 9

PRP in the public sector to improve overall productivity. Problems: in schools, kids levels of intellectual vary per school.

Question 10

Local pay

Answer 10

Local rather than central pay bargaining. National pay rates rarely reflect local conditions, and reduce labour mobility. Labour moves where it’s needed most.

Question 11

2) Improving the performing of firms

Answer 11

• technology
• deregulation
• privatisation
• new firms

Question 12

Technology

Answer 12

Government could give new technology to firms, so they innovate. Through grants or the tax system. However, subsidies aren’t typically supply side they have government involvement.

Question 13

Deregulation

Answer 13

Remove laws on products to encourage entry into the market and increase performance. Increase competition and efficiency. “Bonfire of the red tape”

Question 14

Privatisation

Answer 14

Central in the 1980s/90s. As long as it promotes competition, increases productivity for firms and efficiency for workers.
- lower taxes/costs
- profit motive -> increase efficiency

Question 15

New firms

Answer 15

Constant supply of new businesses. These are often innovative and flexible, helped wuth start-up loans and tax breaks. Improves supply-side performance.

Question 16

Supply-side evaluation

Answer 16

Successful supply-side policies have an impact on all 4 Macroeconomic policies

Question 17

Supply-side advantages

Answer 17

• reduce inflationary pressure in the LR, because of an increase in efficiency and productivity in labour and product markets
• create real (long-term, private sector) jobs through increase in productivity and competitiveness, increase Balance of payments
• less likely to create conflicts between 4 main objectives, which is why it’s been so popular these last 25 years

Question 18

Supply-side disadvantages

Answer 18

• time lags (E.g: education improves human capital and takes years)
• very costly and expensive - increase national debt
• reduces power of various groups - labour markets disregard trade unions
• equity - many of these policies have negative effects on income distribution in SR - increase gap between rich and poor
• becomes ineffective in times of recession- employment never reaches YFE