2.6.3 Supply-side policies Flashcards
2.6 Macroeconomic objectives and policies
What is a supply side policy?
A government policy aiming to increase the productive potential of the economy
What is a free-market SSP?
A policy which aims to inc. efficiency by removing aspects which interfere with the free market
What is an interventionist SSP?
A policy which aims to reduce the potential for market failure
Examples of MOSSPs
- reforming unemployment benefits
- deregulation
- reducing trade union power
- reforming min. wage legislation
- income tax reforms
Examples of ISSPs
- training and education reforms
- improved transport/infrastructure
- subsidising expenditure on R&D
- improved healthcare
- management of the exchange rate
Diagrams for SSP impacts
Improvement in Q2CELL:
- outwards shift of a PPF
- outwards shift of the AS curve
Effect of SSPs on inflation
Lower inflation:
Outwards shift of AS results in a lower PL - this also means that AD can be increased without fuelling demand-pull inflation pressures (greater space capacity and more productive resources)
Effects of SSPs on unemployment
Lower unemployment:
SSPs can help increase incentives to work/increase skills within the workforce/etc. - this can reduce the natural rate of unemployment
Effect of SSPs on economic growth
Improved ec. growth:
Increasing LRAS allows the ec. to grow and expand output, without growing inflation
Effect of SSPs on trade/BoP
Improved trade/BoP:
SSPs can allow firms to be more productive and competitive(internationally), which could result in lower CoP or higher exports
Disadvantages of SSPs
- time lags: cannot fix the ec. quickly
- unintended consequences
- can be costly for the govt. (worsened govt. budget)
- negative effect on equity/environment
Eval. of SSPs
- depends on the current level of growth (POG/NOG)
- the ability to create employment depends on substitutes (e.g. technology)
- productivity growth depends on private enterprise/trends in technological innovation
