2.6 Supply Side Policies

Question 1

What are supply side policies?

Answer 1

Government strategies aimed at boosting the productive capacity of the economy by increasing the quality and or quantity of factors of production.

Question 2

How do supply side policies increase the production side of an economy?

Answer 2

Achieved by improving the institutional framework and the economy’s productive capacity to produce.

Question 3

How can the productive capacity of an economy be improved?

Answer 3

By increasing the quantity and quality of the factors of production.

Question 4

Why are supply side policies used?

Answer 4

Because increase in the productive capacity of the economy can only be achieved through an increase in the economy’s LRAS ie. they are designed to make the economy more productively efficient in the long run.

Question 5

What are some examples of supply side policies?

Answer 5

Cuts in welfare benefits to create incentives to work.
Labour market reforms such as greater spending on education and training to improve the quantity and quality of labour.
Using tax cuts to create incentives to work.
Removal of labour market imperfections such as reducing the power of trade unions.

Question 6

What are interventionist supply side policies?

Answer 6

The deliberate attempts by a government to deal with market imperfections in the economy.

Question 7

What is the potential output of an economy?

Answer 7

Refers to the productive capacity (maximum possible output) if all factors of production are used efficiently. Diagrammatically the potential output of an economy is shown on its PPC.

Question 8

What does institutional framework refer to?

Answer 8

Established systems, structures and contexts that shape the economic behaviour in a country eg. cultural norms and the legal system.

Question 9

What do interventionist supply side policies do in the short term?

Answer 9

Increase AD.

Question 10

What do interventionist supply side policies do in the long term?

Answer 10

Increase the economy’s AS.

Question 11

What does human capital refer to?

Answer 11

The stock of knowledge, skills, expertise and experience of the workforce.

Question 12

What is an important interventionist supply side policy to increase human capital?

Answer 12

To increase spending on education and training to raise skills, mobility and productivity of the labour force.

Question 13

What does government intervention in labour market achieve?

Answer 13

To enhance the demand for and supply of labour and to improve labour mobility.

Question 14

What does investment in human capital increase in the short run?

Answer 14

National incomes as the expenditure increases AD in the short run.

Question 15

What does investment in human capital increase in the long run?

Answer 15

Improves the productive capacity of the economy as it increases a country long run AS.

Question 16

What can improved communication in the job market help to do?

Answer 16

Reduce frictional unemployment in the economy.

Question 17

Why is investment in human capital vital for economic growth and development?

Answer 17

The increase in AD in the short run and the greater productive capacity in the long run mean that investment in human capital is vital for economic growth and development.

Question 18

Why will policies that encourage investment in new technology have a short term effect on AD?

Answer 18

Because such expenditure will increase AD ceteris paribus.

Question 19

What are the effects of investment in new technology in the long run?

Answer 19

Because it can increase the productive capacity and productivity of the economy ie. it shifts the economy’s LRAS curve outwards.

Question 20

What are the benefits of research and development?

Answer 20

It can improve work processes thereby enhancing efficiency, it can also generate new products for consumption and export.

Question 21

Why is investment in technology important?

Answer 21

It can be an important course of international competitive advantage.

Question 22

What effect will expenditure on improving infrastructure have on AD in the short run?

Answer 22

Since investment is a key component of AD it will increase AD in the short run thus boosting economic growth ceteris paribus.

Question 23

What effect will expenditure on improving infrastructure have on AD in the long run?

Answer 23

Shifts the economy’s LRAS curve ti the right and attracts FDI.

Question 24

What are industrial policies?

Answer 24

Those that target specific key industries to promote economic growth.

Question 25

How can tax cuts targeted at strategic industries help?

Answer 25

They help to revive them and grow in the long run.

Question 26

How can incentives for firms to locate to less prosperous areas of a country be created?

Answer 26

A combination of ta breaks and subsidies on commercials loans, if they relocate the reduces unemployment and increases the economy LRAS.

Question 27

How can subsidies be granted to firms?

Answer 27

If they hire youth workers, mature staff and discouraged workers. May also be offered on loans to encourage business start ups.

Question 28

Why are industrials supply side policies good?

Answer 28

They can improve economic welfare in terms of lower unemployment and increased earnings fr those working in these industries, thus industrial policies improve the likelihood of sustainable economic growth.

Question 29

What are market based supply side policies?

Answer 29

Focus on allowing the free market to operate with minimal government intervention by improving market incentives to increase investment and productivity.

Question 30

What are some examples of market based supply side policies?

Answer 30

Income tax reforms to improve the incentive to work.
Labour market reforms to increase AS.
Policies to encourage competition and efficiency.
Tax incentives to encourage FDI.

Question 31

What is privatisation?

Answer 31

The sale or transfer of state owned assets and operations to the prove sector. It can make firms become more efficient in order to make a profit and survive.

Question 32

What is deregulation?

Answer 32

The reduction or removal of barriers to entry into certain industries to make markets more competitive and efficient eg. getting rid of government rules and directives in a certain industry to promote competition and greater efficiency.

Question 33

What is anti monopoly regulation?

Answer 33

Used to promote competition in targeted industries. Refers to competition law that controls the restrictive practices of monopolists hence limiting their market power in industry.

Question 34

What is trade liberalisation?

Answer 34

Involves the reduction of removal of trade barriers such as tariffs or subsidies to encourage competition and efficiency. Allowing the free movement of capital flows and encouraging FDI are further examples.

Question 35

What are labour market reforms?

Answer 35

Government policies designed to create greater flexibility an efficiency in the labour market eg. reducing the power of labour unions, cutting unemployment benefits and abolishing the national minimum wage.

Question 36

What is a trade union/

Answer 36

An organisation that represents the common interest of its members in work related matter eg negotiations over wages and working conditions.

Question 37

What do supply side economists argue about underlying causes of imperfection in the labour market?

Answer 37

They are high rates of income tax and excessive regulations that reduce incentives to work.

Question 38

What do supply side pokies that target labour market reforms do?

Answer 38

Creat incentives to work.

Question 39

What do market based plaices aim to do to the labour market?

Answer 39

Make the labour market more efficient ie. responsive to changes in the market forces of demand and supply. A flexible labour force is responsive to changes in the economy eg/ workers are able to adapt from declining industries to growing industries.

Question 40

What can reducing unemployment benefits do to the labour market?

Answer 40

Make it more responsive to market forces as the unemployment can no longer rely on welfare benefits. Eg, trade unions psh for a higher national minimum wage bu this can be highly costly to firms thereby artificially reducing their international competitiveness.

Question 41

What can reducing direct taxes do?

Answer 41

Creat incentives for people to work or seek employment opportunities therefore such makes based supply side policies are designed to reduce the level of unemployment.

Question 42

How are cuts in business taxes used as incentives?

Answer 42

Used as incentives to invest by reducing the financial risks of investment. Similarly cuts in capital gains taxes imposed not he profit of an asset once sold can also enorugaec risk taking and investments in the economy.

Question 43

What are some advantages of supply side policies?

Answer 43

Improved economic growth - can be used to achieve sustainable economic growth by increasing the potential capacity of the economy over time.
Lower inflation - as the policies increase the productive potential of the economy they help to prevent the general price level from rising beyond control.
Lower unemployment - an increase in the productive capacity will tend to increase national output, thereby creating jobs in the economy in the long term. They can also help to reduce frictional and structural unemployment.
Improved balance of payments - since they improve productivity and national output without pressure on the general price level, the international competitiveness of the country should improve thus helping to increase exports.
Improved equity - interventionist supply side policies can lower the natural rate of unemployment in the economy thus reducing inequity.

Question 44

What are the limitations of using supply side policies?

Answer 44

Time lag - the main criticism of supply side policies is the time that it takes to reap the benefit.
Decreased equity - interventionist supply side policies do not necessarily improve equity in the distribution of income in the economy since economic growth can create greater disparities in income distribution.
Effect on the environment - supply side policies strive to increase the potential output of the economy but this can come at a huge opportunity cost to the natural environment.