Chap 28

Question 1

Define Supply-side policy

Answer 1

measures designed to increase aggregate supply

Question 2

Aims of supply-side policies

Answer 2

• Increase productive potential
• Increase the quantity and quality of resources
• Raise the efficiency of product and factor markets

Question 3

Supply-side policy examples

Answer 3

1. Improving education and training
2. Cutting direct taxes and benefits
3. Reforming trade unions
4. Privatisation.

Question 4

How will improving education and training increase aggregate supply?

Answer 4

Increases the skills of workers making them more productive which reduces costs of production and raises the quality of the products, helping them sell more

More skilful workers are also likely to be more occupationally mobile so supply would adjust more quickly to changes in demand.

Question 5

How will lowering direct taxes and increasing incentives increase aggregate supply?

Answer 5

Reducing income tax rates /cut in unemployment benefits will encourage the unemployed to search for work more actively and may increase the labour force

Cutting corporation tax may increase the incentive to invest. This is because it is likely to make firms more willing and able to invest.

Question 6

How will lowering direct taxes and increasing incentives not help in increasing aggregate supply?

Answer 6

Some workers may respond to lower income tax by working fewer hours

Will not be effective if there are not jobs available for the unemployed and those currently inactive to do.

The unemployed & the disabled will have less income to spend. This may result in a fall in aggregate demand and so output and employment.

f firms do not think they will be able to sell more goods and services in
the future, they will not want to expand.

Question 7

Define Deregulation

Answer 7

the removal of rules and regulations

Question 8

How will deregulation increase aggregate supply?

Answer 8

If deregulation does increase competition, it may increase efficiency and so lower costs of production and prices.

Question 9

Aims of deregulation

Answer 9

Removes barriers to entry to markets

Reduces the costs of complying with the rules and regulations

Reduces the cost to the government of regulating the industries and occupations affected

Question 10

How will deregulation decrease aggregate supply?

Answer 10

Monopoly will develop

Imposing restrictions on who can undertake particular occupations may also protect consumers

Question 11

How will privatisation increase aggregate supply?

Answer 11

Moving industries into the private sector may put more pressure
on them and provide them with a greater incentive to respond to changes in consumer demand, and to provide them with high quality products at low prices.

Privatisation will increase productive capacity, if private sector firms invest more and work more efficiently than state- owned enterprises.

Question 12

How will privatisation decrease aggregate supply?

Answer 12

A monopoly may develop

A private sector firm may be less inclined to take into account social costs and social benefits than a state-owned enterprise and may be more willing to make workers redundant.

Question 13

How will Labour market reforms increase aggregate supply?

Answer 13

Removing long contracts-

Increases the efficiency of labour markets (easier for firms to adjust their supply to changing market conditions)

It may also encourage firms to employ more workers as they will know that they will not have to continue to pay them, should demand for their products fall.

Reform of trade unions-

If the power of trade unions is reduced, they may be less inclined to engage in industrial action.

There may be less disruption to production and trade union members may be more willing to be flexible in what tasks they do and the hours they work.

Question 14

Define Labour market reforms

Answer 14

Designed to make labour markets work more efficiently. The intention is to increase the quality, quantity and flexibility of labour.

Question 15

How will Labour market reforms decrease aggregate supply?

Answer 15

Firms may not spend as much on training their workers if they think the workers may not be with them for very long.

Question 16

How will Subsidies increase aggregate supply?

Answer 16

New small firms might be subsidised in order to increase competition in markets.

Firms may also be subsidised to encourage them to buy new capital equipment.

(Risk that the firms may become dependent on the subsidies)

Question 17

Govts macroeconomic aims

Answer 17

1. Economic Growth
2. Price Stability
3. Full Employment
4. Balance of Payments Stability
5. Income Redistribution

Question 18

How does supply side policies help to achieve aims?

Answer 18

1. Increasing aggregate supply enables an economy to continue to grow in a non-inflationary way
2. Increasing productive potential and efficiency can improve an economy’s balance of payments position.
3. Producing better quality, and cheaper, products can increase exports and reduce imports.

Question 19

What can a government do to try to ensure that it achieves all its macroeconomic aims?

Answer 19

1. By using a number of policies (provide investment grants to firms and place a tax on imports)
2. Have as much accurate information as possible. (Size of the multiplier effect of any increase in aggregate demand- may push up the price level)
3. Implement their policies relatively quickly (danger that economic activity undergoes a change and the policy measures may actually harm the economy)