4.5 - Supply-side Policy

Question 1

Supply-side policy

Answer 1

Aim to make markets and industries
operate more efficiently in order to
expand the productive potential of
an economy and increase its total
output (aggregate supply)
- by increasing the quality or quantity of the factors of production

Question 2

Outward shift on PPC

Answer 2

More consumer goods & more capital goods can now be produced using all of the available resources

Question 3

How does supply-side policy affect economic growth?

Answer 3

potential national output increases leading to higher real gross domestic product (rGDP)

Question 4

How does supply-side policy affect inlflation?

Answer 4

a greater supply in the economy results in reductions in the prices of goods/services leading to disinflation

Question 5

How does supply side policy affect unemployment?

Answer 5

this should fall as more workers are required to produce the higher levels of output

Question 6

How does supply-side policy affect balance of payments?

Answer 6

due to the increased supply, the prices of goods/services often decrease which makes them relatively more attractive to foreigners - so exports increase & the current account balance improves

Question 7

How does supply-side policy affect the redistribution of income?

Answer 7

this often worsens with the use of supply-side policies as wages fall & government tax revenue has fallen too

Question 8

The nine supply-side policies

Answer 8

1. Selective tax incentives
2. Selective subsidides
3. Improving education and training
4. Labour market reforms
5. Increasing competition
6. Removing trade barriers
7. Privatisation
8. Regulation and deregulation

Question 9

Strengths of supply-side policies (name 2)

Answer 9

• They increase the rate of growth of an economy
• They reduce inflation
• They often reduce unemployment
• They often increase the value of net exports as an increase in total supply usually results in lower prices leading to greater exports

Question 10

Weaknesses of supply-side policy (name 2)

Answer 10

• The distribution of income worsens
• They are expensive to implement
• There are significant time lags between government expenditure & seeing the benefits
• Due to the long-term nature, changes in government often result in changes to budgets & scope of projects
• Vested interests can result in less effective outcomes