2.6.3 Supply-side Policy

Question 1

Define supply-side policies

Answer 1

Supply-side policies are aimed at increasing LRAS

Question 2

Distinguish between market based policies and interventionism policies

Answer 2

Market based policies are tailored closer to the free market as it removes government intervention however interventionism policies are more Keynesian as they involve the introduction of more regulation.

Question 3

Give 5 examples of supply-side policies and explain how these affect LRAS

Answer 3

1) Investment into health and education:
- This increases the quality of life and labour as people will live for longer with a higher skill set and as this is a factor of production it increases productive potential.

2) Increasing the minimum wage:
- This will increase the incentive to work meaning that the inactive population will decrease therefore the quantity of labour will increase shifting the PPF outwards increasing LRAS

3) Investment in infrastructure (transport, communication):
- This improves the quantity of capital which increases productivity as people are able to waste less time travelling and spend more time working which will increase LRAS

4) Removal of trade barriers:
- This improves LRAS because by reducing trade barriers and tariffs there is an increase in quantity of capital as more goods enter the economy. This will then shift the PPF outwards increasing LRAS

5) Allowing immigration:
- This increases the pool of labour in the UK which simply increases the quantity of labour and as this is a factor of production it increases LRAS

Question 4

Show the advantages and disadvantages of supply-side policies

Answer 4

+ All government objectives can be achieved at once without trade offs

• This can be very expensive so there are opportunity costs
• There can be a time lag until the results are seen
• Due to the time lag it is difficult to measure