2.6.3 Supply-side Policies

Question 1

Supply-side policy

Answer 1

a government scheme to promote market forces, cut costs and to raise the full employment level of output

Question 2

Difference between market-based and interventionist policies

Answer 2

• Market-based policies focus on the power of the free market or allowing the forces of supply and demand to eliminate equilibria imbalances.
• interventionist policies focus on the need for the govt to intervene in markets to achieve a goal

Question 3

Market-based policies

Answer 3

Market-based policies focus on the power of the free market or allowing the forces of supply and demand to eliminate equilibria imbalances.

Question 4

Supply-side policies aim to

Answer 4

• increase incentives
• promote competition
• reform the labour market
• improve skills and quality of the labour force
• to improve infrastructure

Question 5

How do supply-side policies aim to promote competition?

Answer 5

Faster pace of invention and innovation = increased competition

Question 6

How can supply-side policies help increase incentives?

Answer 6

• using the tax system to provide incentives to help stimulate factor output
• e.g reducing direct tax rates (income and corporation tax)
• lower income tax = incentive for unemployed workers to join the labour market
• lower corporation tax = incentive for entrepreneurs to start

Question 7

How can supply-side policies promote competition?

Answer 7

• the removal of restrictive practices & labour market rigidities e.g the protection of employment

Question 8

Supply-side policies promoting competition example

Answer 8

• in 1980s trade union powers were greatly reduced by e.g limiting worker’s ability to call a strike and enforcing secret ballots of union members prior to strike action

Question 9

How can supply-side policies improve skills and labour force?

Answer 9

• human capital development (education and training to improve skills, flexibility and mobility)
• e.g govt may set and monitor standards of teacher and force schools to include a skill

Question 10

Effect of deregulating/privatising the public sector

Answer 10

• deregulation of market = bring down barriers to entry to encourage new and dynamic market entrants
• makes the markets more competitive

Question 11

Market-based supply-side policies include

Answer 11

• reducing income/corporate tax rates
• deregulating/privatising the public sector
• reducing the national minimum wage
• reforming the benefits system to encourage workers to take available jobs
• encouraging free trade

Question 12

Interventionist supply-side policies include

Answer 12

• increased govt spending on education/training
• increased govt spending on healthcare
• increased govt spending on infrastructure
• stricter govt competition policy
• policies to reduce the geographical immobility of labour (e.g improving information on job vacancies and subsidising worker relocation)

Question 13

ow can supply-side policies reduce inflationary pressure?

Answer 13

in the long run because of efficiency and productivity gains in the product and labour markets

Question 14

How can supply-side policies reduce the balance of payments?

Answer 14

They can also help create real jobs and sustainable growth through their positive effect on labour productivity and competitiveness. Increases in competitiveness will also help improve the balance of payments.

Question 15

Supply-side policies disadvantages

Answer 15

• takes a long time to work
• it’s costly to implement
• issue of equity

Question 16

Why do supply-side policies not work in the short run?

Answer 16

• e.g improving the quality of human capital, through education and training, is unlikely to yield quick results
• The benefits of deregulation can only be seen after new firms have entered the market, and this may also take a long time.

Question 17

Why can supply-side cause issues of equity?

Answer 17

• e.g lower taxes rates, reduced union power, and privatisation have all contributed to a widening of the gap between rich and poor.

Question 18

Why are supply-side policies costly to implement?

Answer 18

e.g the provision of education and training is highly labour intensive and extremely costly, certainly in comparison with changes in interest rates

Question 19

see photo 3, 4, 5

Question 20

Advantages of supply side policies

Answer 20

1. reduce possible trade off
2. better able absorb external demand and supply-side shocks
3. raise living standards
4. reduce unemployment
5. improve UK competitiveness

Question 21

Advantages of supply side policies (improve trade-off)

Answer 21

achieve a sustained improvement in the possible trade-off between inflation and unemployment (see Phillips curve

Question 22

Advantages of supply side policies (better absorb external demand)

Answer 22

better able to absorb external demand and supply-side shocks such as rising energy prices or a Chinese slowdown

Question 23

Advantages of supply side policies (raising living standards)

Answer 23

through strong econ growth & spread the benefits of growth more widely/equitably

Question 24

Advantages of supply side policies (reduce unemployment)

Answer 24

reduce unemployment by lowering the natural rate of unemployment (less frictional & structural unemployment)

Question 25

Advantages of supply side policies (improve competitiveness)

Answer 25

improve UK competitiveness in global markets and achieve a stronger balance of trade in g/s

Question 26

Evaluating the effectiveness of supply side policies

Answer 26

1. supply-side policies can have long time lags but this depends on the type of policy
2. the level and growth of AD
3. might lead to greater inequalities of income and wealth
4. sustainability issues
5. relative improvements

Question 27

Evaluating the effectiveness of supply side policies (long time lags)

Answer 27

Supply side policies can have long time lags but this depends on the type of policy and also the country involved

Question 28

Evaluating the effectiveness of supply side policies (level and growth of AD)

Answer 28

the level and growth of AD is also important in making business investment and innovation viable- this is a valid Keynesian issue- demand helps to utilise extra supply

Question 29

Evaluating the effectiveness of supply side policies (inequalities of income & wealth)

Answer 29

Some supply side policies (e.g cutting higher-rate income taxes) might lead to greater inequalities of income & wealth- again it depends on which taxes are changed and by how much

Question 30

Evaluating the effectiveness of supply side policies (relative improvements)

Answer 30

Supply side policies look to achieve relative improvements e.g in productivity- but other countries will be making gains too

Question 31

Micro effect of introducing policies to encourage an increase in new house building

Answer 31

• lower prices = property more affordable
• e.g eliminating VAT on building new homes on brownfield sites reduces costs for building firms and therefore make it more profitable to construct new homes. An increase in supply can bring down prices for home-buyers if the number of new homes exceeds the increase in demand for property.
• Whether prices fall and makes housing more affordable depends on the other costs of building homes. The construction industry might be affected by skills shortages which leads to higher wage costs or higher costs caused by tougher building regulations such as meeting emissions targets.