3.7.1 - Market-Based Supply Side Policies

Question 1

List the four aims of supply-side policies.

Answer 1

• Sustainable economic growth
• Low unemployment
• External balance of the current account balance of payments
• Low inflation or price stability

Question 2

Draw a diagram showing an increase in long-run aggregate supply.

Answer 2

Question 2

What do supply side policies often aim to increase?

Answer 2

The productive potential of the economy; the long-run aggregate supply.

Question 2

Market based supply side policies.

Answer 2

Market based supply side policies aim to increase the growth of AS by placing a greater emphasis on market forces and competition.

Question 2

List the three policy approaches of market-based supply-side approaches.

Answer 2

• Policies that encourage competition in markets.
• Policies that try to increase efficiency in the labour market.
• Incentive-related policies to increase efficiency, innovation and investment.

Question 3

Draw a diagram showing increasing potential output.

Answer 3

Question 3

Draw a diagram showing increase in actual output.

Answer 3

Question 3

List the 6 marked-based supply-side policies to achieve long-run economic growth.

Answer 3

• Deregulation of markets
• Privatization of industries
• Trade liberalization
• Monopoly and competition regulation
• Reducing the power of trade unions
• Changes in taxation

Question 3

Elaborate on deregulation of markets as a market-based supply-side policy to achieve long-run economic growth.

Answer 3

Regulations such as minimum wage and health and safety systems may be designed to improve welfare but they ultimately add to business costs and reduce productive efficiency.

Question 4

Elaborate on privatization of industries as a market-based supply-side policy to achieve long-run economic growth.

Answer 4

The main idea behind privatization is that private sector organizations run more efficiently than public sector enterprises.

Question 4

Elaborate on trade liberalization as a market-based supply-side policy to achieve long-run economic growth.

Answer 4

When trade is liberalized and barriers are reduced or removed, this increases international trade and the efficiency gains that go with it.

Question 4

Elaborate on monopoly and competition regulation as a market-based supply-side policy to achieve long-run economic growth.

Answer 4

When monopolies become established, the lack of competition leads to a fall in business efficiency. Governments put laws and regulations that prevent this from happening.

Question 5

Elaborate on reducing the power of trade unions as a market-based supply-side policy to achieve long-run economic growth.

Answer 5

Trade unions drive up wages and increase business costs; leading to reduced business efficiency.

Question 6

Elaborate on changes in taxation as a market-based supply-side policy to achieve long-run economic growth.

Answer 6

Reduction of taxes leads to greater incentive for workers and more reinvestment and research.

Question 7

List the strengths of market-based supply-side policy to achieve economic growth.

Answer 7

• They use the market to achieve economic growth; this may be more powerful in affecting the economic growth in the long run than interventionist supply-side policies.
• The market-based approach is not as expensive as the interventionist approach.
• Similar to interventionist policies, the market-based supply side policies do not cause inflation the same way expansionary demand-side polices do.

Question 8

List the weaknesses of market-based supply-side policy to achieve economic growth.

Answer 8

• Can work in the long run but relatively ineffective to expansionary demand side when it comes to increasing current growth.
• If deregulation reduces environmental laws, it can have a negative effect on the environment.
• Negatively affects low income workers.
• Reduction in tax may lead to greater income inequality.
• Reduction of trade barriers could lead to business failure and unemployment due to low cost foreign competition.
• Privatization may lead to monopolies.

Question 9

List the 4 supply-side approaches to unemployment.

Answer 9

• Direct tax and benefits
• Trade unions
• Minimum wages
• Labour market regulations

Question 10

Elaborate on direct tax and benefits as a supply-side approach to unemployment.

Answer 10

The combination of reducing direct tax and benefits increases the opportunity cost of not accepting a job.