2.6.3 - Supply - Side Policies

Question 1

What Are Supply Side Policies?

Answer 1

Designed to increase the productive potential of the economy, shifting LRAS to the right.

Question 2

If Supply Side Policies Are Successful, How Does This Effect The Macroeconomic Objectives?
(2 Points)

Answer 2

~ Reductions in unemployment due to growth.

~ Reductions in long term rates of inflation, improving positions in the current account as exports become more competitive.

Question 3

What Are The 2 Groups Of Supply Side Policies?

Answer 3

~ Interventionist.

~ Market-based.

Question 4

What Do Interventionist Supply Side Policies Do?
(2 Points)

Answer 4

~ Promotes more of a role for the government in the economy, to try and increase LRAS.

~ Helps correct market failure.

Question 5

What Do Market-Based Supply Side Policies Do?
(2 Points)

Answer 5

~ Reduce government intervention in markets, to boost efficiency and productivity and promote competition, to try and increase LRAS.

~ Remove anything that prevents the free market system working efficiently.

Question 6

What Causes A Right Shift Of The LRAS Curve?
(2 Points)

Answer 6

~ Increase in the quantity and quality of FOPs.

~ Improvements in the productive efficiency in the economy.

Question 7

What Are Examples Of Interventionist Supply Side Policies?
(3 Points)

Answer 7

~ Government spending on education and training.

~ Government spending on infrastructure.

~ Subsidies to firms to promote investment.

Question 8

Explain ‘Government Spending On Education & Training’ As An Interventionist Supply Side Policy To Shift LRAS
(2 Points)

Answer 8

~ Governments spending money to build new schools, recruit new teachers, train teacher better, curriculum reform.

~ Aim to boost skills and productivity of labour, improving quality of labour.

Question 9

Explain ‘Government Spending On Infrastructure’ As An Interventionist Supply Side Policy To Shift LRAS
(3 Points)

Answer 9

~ Transport infrastructure, new infrastructure being built or upgraded.

~ LR costs of production for business might fall, as it is easier and cheaper to access raw materials and to sell goods and services, increasing productive efficiency.

~ Building of schools and hospitals, increases quantity of labour force.

Question 10

Explain ‘Subsidies To Firms To Promote Investment’ As An Interventionist Supply Side Policy To Shift LRAS
(3 Points)

Answer 10

~ Target firm spending on R&D, or buying and upgrading new capital.

~ Investment can increase Q2 of capital.

~ Can reduce LR costs of production for businesses.

Question 11

What Are Examples Of Market-Based Supply Side Policies?
(3 Points)

Answer 11

~ Tax reform.

~ Labour market reform.

~ Competition policy.

Question 12

Explain ‘Tax Reform’ As A Market-Based Supply Side Policy To Shift LRAS
(5 Points)

Answer 12

1) Lower income tax

~ Provides an incentive for people outside the labour force to enter the labour force, increasing the quantity of labour.

~ For those who are already in work, they have an incentive to work harder, be more productive, earn more income, increasing Q2 of labour.

2) Lower corporation tax

~ Firms have more retained profit, using this for investment purposes, increasing Q2 of labour.

Question 13

Explain ‘Labour Market Reforms’ As A Market-Based Supply Side Policy To Shift LRAS
(4 Points)

Answer 13

1) Reduction in benefits and welfare payments

~ Strong incentive for the economically inactive, to enter the labour force, increasing the quantity of labour.

2) Reduction of minimum wages and trade union power

~ Drive up costs of production for business, reducing them would reduce LR costs for businesses boosting productive efficiency.

Question 14

Explain ‘Competition Policy’ As A Market-Based Supply Side Policy To Shift LRAS
(2 Points)

Answer 14

1) Privatisation, deregulation and trade liberalisation

~ Aim to boost competition across the economy, firms then have to reduce their LR costs of production to be competitive and survive, improving productive efficiency.

Question 15

What Are The Strengths Of Supply Side Policies?
(4 Points)

Answer 15

~ They increase the rate of growth of an economy.

~ Reduce average price levels.

~ Reduce unemployment.

~ Can increase the value of net exports.

Question 16

What Are Evaluation Points That Can Be Used For Supply Side Policies?
(6 Points)

Answer 16

~ No guarantee of success.

~ Policies can be costly.

~ Large time lags.

~ Negative stakeholder impacts. E.g. Deregulation laws might not be in the best interest of society.

~ Depends on the state of the economy.

~ Need to target supply side policies to reduce those issues in the economy.