2.6.3 - supply side policies

Question 1

what are supply side policies?

Answer 1

government attempts to increase aggregate supply (long run productive potential of an economy) via improved productivity, investment and innovation

Question 2

how is the lras shifted right?

Answer 2

through an increase in the quality or quantity of FOPs

Question 3

how can the quantity of FOPs be increased?

Answer 3

-bigger workforce/average weekly hours worked
-importing more raw materials
-increase in capital stock = investment
INVESTMENT is the most important determinant rate of the LR economic expansion

Question 4

how can the quality of FOPs be increased?

Answer 4

-increasing the amount of capital per worker on capital/output ratio results in greater output per worker, higher productivity
-technological advancements

Question 5

what is human capital?

Answer 5

skills and expertise of workers acquired through education and training. increases productivity leading to higher output.

Question 6

what do monetarists argue about monetary policy?

Answer 6

monetary policy can only influence inflation in the long run, not growth or employment. supply side policies must be adopted to increase output and reduce unemployment. they advocate market-orientated supply-side policies to encourage private enterprise, provide incentives and reward initiative

Question 7

what are market-based supply-side policies?

Answer 7

they limit government intervention and allow market forces to eliminate imbalances. they encourage and reward enterprise and initiative and aim to reduce role of government by promoting market forces and competition rather than state intervention and regulation

Question 8

what are three supply side policies?

Answer 8

• increasing incentives
• promoting competition
• reforming labour markets

Question 9

how does increasing incentives work?

Answer 9

reducing taxes:
- income tax cuts or lowered personal allowance = incentivises people to work longer hours, promotes labour force participation and eliminates unemployment trap
- cutting corporation tax to stimulate investment from higher retained profits
- tax relief so the cost of investment can be offset against pre-tax profit
- reducing grants and subsidies to promote incentives to improve dynamic efficiency

reducing benefits:
- eliminates unemployment trap reducing voluntary unemployment

Question 10

How can competition be promoted as a market-orientated supply-side policy?

Answer 10

Privatisation - transfer of state-owned industries to private sector ownership, the public sector is less efficient than private, inefficient use of public funds, profit motive should increase efficient and lower prices to consumers, competition should provide greater choice for consumers
Deregulation - removal of monopoly rights to make the market more competitive
Mobility of FOPs - free trade and removal of capital controls to promote FDI

Question 11

How can reforming labour markets be used as a market-orientated supply-side policy?

Answer 11

reducing the monopoly power of trade unions to encourage labour market flexibility to allow the market to clear, lower wages reduce employment costs increase profitability and should promote investment and reduce cost-push inflationary pressure, removal of national minimum wage causing labour market disequilibrium, reducing automatic entitlement to certain benefits to encourage self-reliance, adopting a tough stance on public sector pay

Question 12

what are the problems caused by supply-side policy?

Answer 12

• pressure on the fiscal budget, expensive = causes a deficit, need for more borrowing
• increased income inequality, changes to taxes and subsidies = reducing benefits to reduce purchasing power and standard of living, inhibits growth via multiplier effect
• labour market policy can distort regional markets causing disequilibrium = government failure
• time lags between policy implementation and effect on economy = take 1-2 years to improve human capital or reduce occupational immobility
• very difficult to shift LRAS = hard to improve quality of FOPs
• not feasible if economy is stagnating
• may cause inflation due to increasing AD
• unemployment may not be reduced by increasing LRAS, unless there is a larger increase in AD
• may widen the distribution of income
• likely to only create low-paid jobs

Question 13

What are interventionist supply-side policies?

Answer 13

policies that involve direct government intervention in markets

Question 14

why are interventionist supply-side policies used?

Answer 14

• to promote competition = a stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete
• to reform the labour market = governments could try and improve the geographical mobility of labour by subsidising the relocation of workers and improving the availability of job vacancy information
• to improve skills and quality of the labour force = the government could subsidise training or spend more on education, this also lowers costs for firms since they have to train less workers. spending more on healthcare helps improve the quality of labour force, contributing towards higher productivity
• to improve infrastructure
  = governments could spend more on infrastructure