5.2 Supply-Side Policies

Question 1

Supply-side policies definition

Answer 1

Deliberate actions taken by the government designed to increase the LRAS of the economy

Question 2

Supply-side improvements definition

Answer 2

These arise out of general increases in productive capacity resulting from businesses acting out of their own interest in improving efficiency and the quantity of their output

Question 3

What is the link between supply-side improvement and supply-side policies?

Answer 3

Direct supply-side policies adopted by the government will also lead to supply-side improvements

Question 4

Effects on GDP from supply-side policies

Answer 4

• increasing the capacity of the economy should lead to higher GDP
• increase trend rate of growth
• needs to be used in conjunction with AD boosting policies to increase GDP

Question 5

Effects on unemployment from supply-side policies

Answer 5

lower unemployment from:

• lower income tax + reduced welfare benefits = more people wanting to work + work harder
• improvements in education and training
• investment in infrastructure = attract more businesses to the UK

Question 6

Effects on inflation from supply-side policies

Answer 6

Lower inflation from:

• more capacity = AD has less pressures = less demand-pull inflation
• deregulation = more competition = less monopolistic power, so prices don’t rise as easily

Question 7

Effects on the balance of payments on current account from supply-side polices

Answer 7

Improvements to the balance of payments from:

• downside pressure on inflation = exports more price competitive
• a more productive workforce should also lead to lower priced goods = cheaper
• quality of output should improve with education and training = increase demand for UK exports

Question 8

Free market supply-side polices definition

Answer 8

Those policies designed to make markets work more efficiently and thus increase aggregate supply for the economy

Question 9

Privatisation definition

Answer 9

The sale of state-owned enterprises to the private sector

Question 10

Deregulation definition

Answer 10

The removal of barriers to competition in an industry

Question 11

Ladder curve definition

Answer 11

Shows how high income tax rates can actually reduce tax revenue due to the reduced incentive to work

Question 12

What graph shows how reducing income tax will increase tax revenues

Answer 12

The laffer curve

Question 13

Describe how the Laffer curve works

Answer 13

If tax revenues are cut down towards T* then taxes revenues actually increase as there is now a greater incentive to work as they keep more of their earned money = decreases voluntary unemployment + more people working = more money spend on goods and services that could have VAT

Question 14

Free market supply-side policies

Answer 14

• income tax cuts
• reduction or elimination of minimum wage legislation
• reduction in unemployment benefits
• reduction in labour protection
• zero-hour contracts
• privatisation

Question 15

How does reduction in labour protection improve the supply side of the economy?

Answer 15

By reducing things such as sick pay, holiday pay ect. It reduces cost for firms = they can employ more workers

Question 16

How does privatisation improve the supply side of the economy?

Answer 16

• moving businesses into the private sector increases efficiency as private businesses will pursuit profit max

Question 17

Interventionist supply-side policies definition

Answer 17

Designed to increase aggregate supply by intervening more in markets, often accompanied by higher targeted government expenditure

Question 18

Interventionist supply-side policies

Answer 18

• education
• training
• industrial policy
• research and development subsidies

Question 19

How does education and training improve the supply-side of the economy?

Answer 19

• giving the worker force a better set of skills = reduce occupational immobility + structural unemployment
• increase productivity of the workforce = increase the productive capacity of the economy

Question 20

What are industrial policies?

Answer 20

• they are changes in legislation affecting the labour market
  E.g = tax breaks, grants to businesses

Question 21

What is the natural rate of unemployment?

Answer 21

The rate of unemployment that exists because of structural and frictional causes

Question 22

Policies that specifically reduce the natural rate of unemployment

Answer 22

• improvements in education reduced occupational immobility as workers have a larger variety of skills
• higher investment in transport infrastructure = reduces geographical immobility as workers find it easier to move to vacancies elsewhere
• lower taxes on incomes + reduce benefits = incentivise work

Question 23

What is the natural rate of unemployment in the UK?

Answer 23

5%

Question 24

What are the limitations of supply-size policies?

Answer 24

• cutting benefits is likely to increase poverty
• reducing the rights of workers may prove unpopular with workers
• these policies may take years to show significant effect
• reducing the rate of tax can lead to a more unequal distribution of wealth