3.7 Supply-side Policy

Question 1

What is supply-side policy?

Answer 1

Any policy that increases the total supply of goods and services in an economy

Question 2

How is supply-side policy different from fiscal and monetary policy?

Answer 2

• By increasing output they reduce inflation without causing unemployment
• They only work in the long term

Question 3

What are five examples of supply-side policies?

Answer 3

1. Education and training
2. Reducing trade union power
3. Improving transport
4. Competition policies
5. Cutting direct taxes on firms

Question 4

How does education and training increase supply?

Answer 4

Better education and training improves worker’s skills. This increases productivity and economic growth.

Question 5

How does reducing trade union power increase supply?

Answer 5

This reduces the number of strikes and puts more people in work, leading to higher economic growth.

Question 6

How does improving transport increase supply?

Answer 6

Helps to improve the mobility of factors of production, making supply more efficient.

Question 7

How do competition policies increase supply?

Answer 7

Control of monopolies leads to increased competition and therefore lower prices (inflation).

Question 8

How does cutting direct taxes on firms increase supply?

Answer 8

Reducing corporation tax encourages firms to invest and international companies to come to the UK. This causes a rise in employment and economic growth as firms expand and start-up.

Question 9

How does reducing benefits and income taxes increase supply?

Answer 9

Lower taxes create an incentive to work and lower benefits force people to work. This increases employment.

Question 10

What are three benefits of supply-side policies?

Answer 10

1. Reduces inflation by increasing supply to meet demand.
2. Increases employment and economic growth as there is more output and this requires more workers.
3. Can target specific markets or parts of the economy to improve efficiency.

Question 11

What are three costs of supply-side policies?

Answer 11

1. Policies take a long time to come into effect and buy this time, the economy may have changed.
2. Maintaining policies over a long period of time is very costly.
3. Policies such as controllong trade unions and reducing benefits are unpopular which can lead to strikes.

Question 12

What is an opportunity cost of supply-side policies? Give an example.

Answer 12

• Undertaking one policy might not involve doing another.
• Eg: spending more on education and training could decrease spending on transport.