2.6 - Supply side policies

Question 1

Supply-side policies

Answer 1

Policies design to boost the productive potential of the economy or
shift the LRAS curve to the right.

Question 2

Two categories of supply-side policies:

Answer 2

• Market-based
• Interventionist

Question 3

Interventionist supply-side policies

Answer 3

• Require direct government intervention to increase the full employment level of output
• These are mainly used to correct market failure

Question 4

Market-based supply-side policies

Answer 4

• Aim to remove obstructions in the free market that are holding back improvements to the long-run potential

> Setting up a regulator to prevent monopolies forming

> Relaxing employment laws to increase flexibility in the labour market

> Privatising government services through contracting out

Question 5

What is the overall aim of supply-side policies

Answer 5

To increase the quantity and quality of the factors of production

Question 6

Market-Based Approach to increase incentives

Answer 6

• Reducing income/corporation tax rates
• Restructuring the unemployment benefits system to incentivise the unemployed to seek work

Question 7

Market based approach to promote competition

Answer 7

• Privatisation and deregulation
• Trade liberalisation

Question 8

Interventionist Approach to promote competition

Answer 8

• Increased government spending on innovation
• Direct support to firms (subsidies) promotes international competitiveness

Question 9

Market-Based Approach
to reform the labour market

Answer 9

• Decreasing trade union power so wages can be decreased
• Decreasing minimum wages to lower costs of production

Question 10

Interventionist Approach to reform the labour market

Answer 10

Increased government spending on improving occupational mobility

Question 11

Interventionist Approach
to improve the skills and quality of the labour force

Answer 11

• Increasing government spending on education and retraining
• Increasing government spending on healthcare so that productivity improves

Question 12

Interventionist Approach to improve infrastructure

Answer 12

Increased government spending on infrastructure

Question 13

Strengths of supply-side policies

Answer 13

• They increase the rate of growth of an economy
• They reduce average price levels
• They reduce unemployment
• They often increase the value of net exports
• Improvements in Infrastructure can raise the quality of life for all citizens

Question 14

Weaknesses of supply-side policy

Answer 14

• The distribution of income worsens as labour market reforms and wage policies lower worker’s wages
• They are expensive to implement
• There are significant time lags between expenditure and seeing the benefits
• Due to the long-term nature, changes in government often result in changes to budgets and scope of projects
  > The end result may be less effective than it could have been
• Vested interests can result in less effective outcomes e.g. There are many examples of privatisation occurring in such a way that the government’s preferred bidders obtained an asset at a knock down price
  > Often the preferred bidders were not necessarily the most efficient firms