2.6.3 Supply-side policies

Question 1

What are supply side policies?

Answer 1

Policies that improve the productive potential of an economy.

Question 2

What is the distinction between interventionist policy and market based polices?

Answer 2

Interventionist - To overcome market failures
Market based - Designed to make markets work better and give the private sector more freedom.

Question 3

What are the main aims of supply side policy?

Answer 3

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

Question 4

Give three examples of interventionist supply side policy

Answer 4

• Gov spending on education and training
• Gov spending on infrastructure
• Subsidising business’s to promote investment

Question 5

What are the main three things which increase productive capacity?

Answer 5

• Quality of FOPS
• Quantity of FOPS
• Productive efficiency (LOWER CPU)

Question 6

What are tax reform SS market based polices ?

Answer 6

-Lower corporation tax
-Lower income tax

Question 7

How does lower income tax increase LRAS?

Answer 7

-Lower income tax -> More incentive for people which are out of work to start work due to higher gain -> Increases quantity of labour shifting LRAS

• Also more incentive to work harder and make more income due to it being taxed at lower rates. Quality of Labour increases

Question 8

How does corporation tax increase LRAS?

Answer 8

Lower corp tax -> Higher retained profits -> May use these retained profits to invest into capital goods -> Increasing capital therefore increasing LRAS

Question 9

What are examples of labour market reform policies ?

Answer 9

• Reduce welfare payments
• Reduce min wages
• Reduce trade union power

Question 10

How does lower welfare payments increase LRAS?

Answer 10

-People which are economically inactive have more incentive to start work due to lower amount of W payments -> increase quantity of work

Question 11

How does reduction or increase in minimum wages increase LRAS?

Answer 11

Increase min wage - More incentive for people to work due to higher wages

Reduction min wage - Lower costs for firms -> Decrease in long run costs of production -> Therefore increase productive efficiency and increase LRAS

Question 12

How does less trade union power increase LRAS?

Answer 12

• Less strikes due to lower power of trade union, therefore increase in quantity of labour due to more days worked and increased output.

Question 13

What are examples of competition market based policies ?

Answer 13

• Privatisation
• Deregulation
• Trade liberation

Question 14

How does privatisation increase LRAS ?

Answer 14

-Privatisation of state assets -> profit incentive -> Leads to innovation of goods and services -> more retained profits which can be used for investment

Question 15

How does deregulation increase LRAS?

Answer 15

Removing gov laws in markets -> may increase incentive to invest and expand FOPS

Question 16

What are some evaluation points for interventionist SSPs?

Answer 16

• No guarantee of success, gov spending may be under utilised.
• Very high amount of gov spending needed for projects such as infrastructure . (Opp Cost)
• Possible time lags due to projects and planning being very time consuming, may see a large time lag before effects start to kick in.

Question 17

What are some evaluation points for Market Based SSPs

Answer 17

• Policies such as deregulation may have negative externalities such environmental effects as a result of the removal of legislation
• Reduction in corporation tax may not always have a increase in investment, rather an increase in dividends

-Opportunity cost