2.6 Macroeconomic objectives and policies part two Flashcards
How can the government improve infrastructure?
(Supply-side policies)
The government can improve infrastructure through offering tax incentives or subsidies on investment. This means that more investment can be made into buying new technology which will allow more firms to make improvements in technology. Improvements in technology will mean that the production is more efficient so less resources are need to to produce the same amount of goods whilst buying more technology will mean that more goods and services can be produced.
What is the problem with improving infrastructure?
(Supply-side policies)
Offering tax breaks/subsidies could have adverse on the government budget as it means they lose tax revenue, so less can invested into sectors such as education and healthcare, leading to the quality of these sectors being reduced.
Some businesses may not actually invest this money and instead use it as a method of tax evasion.
Moreover, not all investment will be successful in improving supply as investment from firms may not even be aimed at increasing supply.
What are good evaluative points for supply-side policies?
Unlike demand-side policies, supply-side policies are able to both increase output and decrease prices.
Supply-side policies are more long-term policies and lead to long-term economic growth, rather than small changes in economic growth following changes in AD.
Moreover, they can be directed at increasing exports which will also improve the balance of payments.
What are some negative evaluative points for supply-side policies?
-The Keynesian LRAS curve shows that they have no impact when LRAS is elastic, and so demand-side policies are needed to fix the problem in the short run.
-Supply side policies can also take a long time have any effect on output and this makes them less useful.
-Often, the government has to spend more money (e.g. on education) or decrease taxes, which will decrease their revenue and lead to a budget deficit.
