26 - Supply side policies

Question 1

Supply side policies

Answer 1

long-term government strategies used to increase the potential productive capacity of the economy by increasing the quality and/or quantity of factors of production

Question 2

Market-based supply-side policies

Answer 2

Market-based supply-side policies focus on freeing up markets, and improving market incentives in order to increase aggregate supply, thereby improving incentives to increase investments and productivity and incentives to work.
- policies to encourage competition
- labour market policies
- incentive-related policies

Question 3

Policies to encourage competition

Answer 3

• Deregulation
• Privatization
• Trade liberalization
• Anti-monopoly regulation

Question 4

Labour market policies

Answer 4

• Reducing the power of labour unions
• Reducing unemployment benefits
• Abolishing minimum wages

Question 5

Incentive-related policies

Answer 5

• Personal income tax cuts
• Cuts in business tax and capital gains tax (CTG)

Question 6

Interventionist policies

Answer 6

the deliberate attempts by a government to influence aggregate supply and the productive capacity of the economy
-Education and training
- Improving quality, quantity and access to healthcare
- Research and development
- Provision of infrastructure
- Industrial policies

Question 7

Demand-side effects of supply-side policies

Answer 7

Supply-side policies are long-term strategies used to increase the potential output of the economy. However, some of these policies will have demand-side effects on the level of aggregate demand, while some demand-side policies will have supply-side effects too.
- e.g. tax cuts on personal income and business profits help to increase household disposable income and increase the level of retained profits for firms. Hence, having an expansionary fiscal effect on both consumption (C) and investment (I), thereby boosting the level of aggregate demand.

Question 8

Constraints of SSP

Answer 8

Constraints on market-based supply-side policies
- Equity issues
- Time lags
- Vested interests
- Environmental impact

Constraints on interventionist supply-side policies
- Cost
- Time lags

Question 9

Strengths of SSP

Answer 9

Strengths of market based supply-side policies
- Improved resource allocation
- No burden on government budget

Strengths of interventionist supply-side policies
- Direct support of sectors important for growth