4.2.5.2: Supply Side Policies

Question 1

What are the aims of supply side policies?

Answer 1

• increasing quantity or quality of factors of production
• improving the efficiency of markets

Question 2

What are supply side policies?

Answer 2

Policies that can help achieve all 4 of the macroeconomic objectives, they can lead to growth, reductions in unemployment, reductions in inflation and an improvement in the balance of payments position.
—> they are shown on a diagram as a shift right of LRAS

Question 3

What are some examples of free market supply Side policies?

Answer 3

• increasing incentives —> such as reducing unemployment benefits or reducing income tax to get more people working (therefore increasing quantity of the labour force) or providing incentives for firms to invest in R&D as will lead to more/better capital and increasing efficiency.
• reforming the labour market - e.g. reducing NMW or r trade union power making employment less restrictive and increases mobility of labour.
• promoting competition —> deregulating or privatising the public sector so firms can compete in a competitive market (improving efficiency)

Question 4

What are some examples of interventionist supply-side policies?

Answer 4

• improve skills and quality of labour —> subsidising training and spending more on education (increasing productivity and quantity of the labour force)
• improving infrastructure —> e.g. high speed rail links, improving geographical immobility o labour.
• reforming the labour market - e.g. subsidising the relocation of workers and improving the availability of job vacancy info to improve geographical immobility of labour
• promote competition - stricter gov competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete too.

Question 5

What’s some strengths of supply side policies?

Answer 5

• no trade off with supply side policies (unlike demand side), as can achieve all 4 objectives.
• only policy that can deal with structural unemployment, because labour market can be directly improved with education and training

Question 6

What are some of the weaknesses to supply side policies?

Answer 6

• can be expensive, worsening the govs budget position, potentially increasing an already large deficit and adding to gov debt.
• can take a long time to have any impact - can are years - so large time lags
• market based SSP such as reducing the rate of tax, could lead to a more unequal distribution of wealth.

Question 7

What’s best for the economy?

Answer 7

A combination of demand and supply side policies will be best for the economy. This means you can achieve instant improvements in growth and unemployment, whilst easing the long-term pressure on the price level.

Question 8

What are market based polices?

Answer 8

Market-based policies limit the intervention of the government and allow the free market to eliminate imbalances. The forces of supply and demand are used.

Question 9

What are interventionist policies?

Answer 9

Interventionist policies rely on the government intervening in the market.

Question 10

What is the difference between supply side policies and supply side improvements?

Answer 10

Supply side improvements originate in the private sector independently of Gov, e.g. firms improving their productivity through innovation and/or investment.