2.6 topic sheets Flashcards
Define supply side policies?
Any government policy that is designed to increase LRAS.
What is the difference between Market-based and interventionist policy
Market based- one where the level of intervention from the government is removed to encourage private business.
Interventionist- Increasing government regulation/intervention to improve outcome.
Give 5 examples of supply side policies?
And the impact they have on the economy.
- Investment into health and education: This improves quality of Labour and less time is being spent through illness.
- investment into infrastructure
This makes the quantity of travel infrastructure increase.
Consequently, this makes transport quicker which means less time travelling and more time working.
This increases productivity.
-Increasing the minimum wage
this increases the incentive to work, so more people join the labour force increasing the supply of labour. It also makes the people already in jobs more motivated as they feel like they are getting a fair wage.
-Privatisation and De-regulation.
If firms are privatised they have more of an incentive to make a profit due to the profit motive and this will lead them to increase output.
Also as there is deregulation there Is less “red tape” so it makes this easier for business to increase output.
-Reducing corporation tax
Firms are taxed less on profits which means they have more retained profits. They are more likely to re-invest to grow their business. This is increases the productive potential of the economy.
Explain the advantages and disadvantages of supply side policies.
Advantages-
Government can achieve macroeconomic objectives without having tradeoffs.
Disadvantages- They can be expensive so there is an opportunity cost.
There is a time lag between implementation and seeing the benefits.
Due to the time lag it is difficult to see how effective they are.
What does the Phillips curve show?
Shows that there is an inverse relationship between unemployment and inflation.
When Unemployment is high inflation is low and when Unemployment is low inflation is high.
This is because of Labour Markets (shortage of labour and skills), Other Factor Markets (the rising price of commodities), Goods markets (When there is an increase in demand and businesses can no longer increase supply they increase prices)
Draw a Phillips curve?
Unemployment on x axis and inflation on Y axis.
see photo attached.
Does low unemployment have to conflict with inflation?
Not always as there has been times in history where workers have not expected large wage rises to move to other jobs.
Another time is when there is downward pressure on prices caused by other factors eg, low aggregate demand.
Does economic growth conflict with environmental or sustainable goals?
It often does, as in order for economic growth output must increase, with this increased output more resources will be used eg energy.
However if goods are produced sustainably, this can lead to increased output without any environmental problems.
Does economic growth have to conflict with current account balance?
It often does as when there is economic growth, disposable income rises which increases demand for goods so more needs to be imported.
However, if the growth is export-led like China it will not cause a balance of payments deficit.
What is a tradeoff?
A tradeoff is when is when an economic agent (Producer, Consumer and Gov) has to prioritise objectives as they cannot all be achieved at once.
They are mutually exclusive.
What other tradeoffs may the government have to make in order to reach economic growth.
- Inequality in distribution of wealth and economic growth.
- Must sacrifice 2% target in inflation to achieve budget balance.
Give 3 examples where policy instruments may interfere with each other?
Low interest rates to boost the economy, whilst they cut budget deficit, decreasing economic growth.
Decreasing spending on Health and Education In order to cut deficit, however it impacts Long Run economic growth.
Looser monetary policy like low interest rates and QE, to encourage lending. Then regulating banks which restricts lending.
What are the difficulties when prioritising which police instrument to use?
- Need to choose the policies that support each other rather than conflict.
- Choose the ones that achieve the most objectives possible.
- Ones that do not sacrifice long term for short term gains.
How are policy instruments linked indirectly?
If the bank of England decide to increase interest rates this could cause AD to fall and lead to higher unemployment. However, this would mean that the government would have to spend more finances on Jobseekers Allowance.
Another example was when the government were implementing a policy of austerity when and the Bank of England tried to implement more loose monetary policy.
