3.7 Supply-side Policy

Question 1

Supply side-policy definition

Answer 1

Aimed at increasing the ability of the economy to supply more goods and services, through increasing the productive capacity.

Question 2

Type of supply-side policy

Answer 2

1) increase quantity of factors of production
2) improve quality of the factors of production
3) improve the efficiency of product and factor markets

Question 3

Examples of supply-side policy

Answer 3

• education and training, increase the quality of labour
• reducing direct taxes on workers and firms, increasing the quantity of labour
• reducing benefits , encouraging more people to work, increasing the quantity of labour
• R&D, technological progress, will increase the quantity and quality of capital

Question 4

Evaluating supply-side policy (benefits)

Answer 4

• targets specific markets, can target particular markets in order to improve efficiency and productive capacity, e.g specific skill shortages in doctor’s
• increased employment, since more output requires more workers, greater levels of productivity can lead to higher wages

Question 5

Evaluating supply-side policy (costs)

Answer 5

• time lags, can take a long time to implement, e.g education, infrastructure
• expensive
• possible inflation, AD could grow too quickly due to increased goverment spending on supply-side policy, leading to demand-pull inflation if productive capacity grows slower
• inequality, may have a negative effect on the distribution of income e.g reducing benefits