8- Supply side policies

Question 1

Aim of supply side policies

Answer 1

To increase productive potential of the economy

Question 2

2 types of supply side policies

Answer 2

• Market based

- Interventionist

Question 3

Market based policies

Answer 3

• To increase incentives (reducing taxes and benefits)
• Promote competition (deregulation and privatisation)
• Reform the labour market (reduce NMW or reduce trade union power)

Question 4

Interventionist policies

Answer 4

• To improve skills and quality of work force (education spending, health care, infrastructure- to improve productivity)
• Reform labour market (subsidise the relocation of workers- overcome geographical immobility)
• Promote competition (reduce monopoly power)

Question 5

Supply side policies to reform the labour force

Answer 5

• Increase retirement age- bigger work force
• Weakening trade unions- lower wages- lower costs- higher AS
• More flexible labour- zero hour contracts
• Relax labour laws- firms more likely to hire
• Improve geo mobility- more job info
• Lower NMW- less unemployment
• Less benefits- more incentive to work

Question 6

Evaluation of Supply side policies to reform the labour force

Answer 6

• Trade union power is already very weak in the UK
• Reducing benefits- lowers AD- if they can’t get jobs
• Negative multiplier of reduced benefits- as the poor have high MPC and will increase income inequality.

Question 7

Supply side policies to increase incentives

Answer 7

• Reduction in benefits/taxes- will increase opp cost of being out of work- people better to work than be on benefits
• Low benefits may reduce poverty trap
• Free child care- more woman in work
• Reduce taxes on firms (national insurance contributions) increase incentive to employ like a fall in NMW
• Lower taxes- more incentive to invest

Question 8

Evaluation of Supply side policies to increase incentives

Answer 8

• Small change in tax will have a little impact on incentives
• Reducing benefits will lead to income inequality like a fall in taxes on the rich.
• Fall in taxes will lead to a fall in gov revenue.

Question 9

Supply side policies to promote competition

Answer 9

• Privatisation
• Deregulation- reduce restrictions on businesses
• Competition policy

Question 10

Evaluation of Supply side policies to promote competition

Answer 10

• Deregulation and privatisation may lead to a fall in product standards or environmental issues.

Question 11

Supply side policies to improve skills and quality of the labour force

Answer 11

• Increase spending on education- free university tuition, apprenticeships
• Regulation to force businesses to train own staff
• More lax rules for skilled migrants
• More healthcare spending

Question 12

Evaluation of Supply side policies to improve skills and quality of the labour force

Answer 12

• Time lag
• Expensive
• High opportunity cost

Question 13

Supply side policies to improve infrastructure

Answer 13

• Tax incentives or subsidies on investment- less tax on businesses who reinvest profits
• Reduce cooperation tax
• Gov spending increase- HS2- will lower transport cost- improve efficiency

Question 14

Evaluation of Supply side policies to improve infrastructure

Answer 14

• Tax incentives- potential loss of gov revenue
• Some businesses may not reinvest profit but use the system as a form of tax evasion
• Not all investment will be successful

Question 15

General evaluation of supply side policies

Answer 15

• Time lags
• Expensive- could increase budget deficit
• Increase output and can lower prices
• Can increase exports- better trade balance
• Will have no impact when Keynesian LRAS is elastic (short run)- need demand side policies
• Demand impacts