Chapter 13.6

Question 1

Goals of supply-side policies

Answer 1

Promote long term growth by increasing the productive capacity of the economy
Improve competition and efficiency
Reduce costs of labor and reduce unemployment through greater labor market flexibility
Increase incentives of firms to invest in innovation by lowering costs of production
Reduce inflation to improve international competitiveness

Question 2

Labor market flexibility

Answer 2

The responsiveness of the labor market to market forces

Question 3

Types of market-based supply-side policies

Answer 3

Encouraging competition
Labor market reforms
Incentive-related policies

Question 4

Types of competition encouraging supply-side policies

Answer 4

Privatization
Deregulation
Contracting out to the private sector
Anti-monopoly regulation
Trade liberalization

Question 5

Privatization

Answer 5

A transfer of ownership of a firm from the public to the private sector

Question 6

Deregulation

Answer 6

The elimination or reduction of government regulation of private sector activities

Question 7

Types of labor market reform supply-side policies

Answer 7

Abolishing minimum wage legislation
Weakening the power of labor unions
Reducing unemployment benefits
Reducing job security

Question 8

Labor union

Answer 8

An association of workers in a particular profession whose objective is to improve working conditions and defend rights of workers, representing its members in negotiations with employers

Question 9

Types of incentive-related supply-side policies

Answer 9

Lowering personal income taxes
Lowering taxes on capital gains and interest income
Lowering business taxes

Question 10

Incentive-related policies

Answer 10

Policies that involve cutting various types of taxes which are expected to change the incentives faced by taxpayers

Question 11

Types of interventionist supply-side policies

Answer 11

Investment in human capital
Investment in new technology
Investment in infrastructure
Industrial policies

Question 12

Types of investment in human capital

Answer 12

Training and education
Improved health care services and access to these

Question 13

Infrastructure

Answer 13

A type of physical capital, resulting from investment

Question 14

Industrial policies

Answer 14

Government policies designed to support the growth of the industrial sector of an economy

Question 15

Types of industrial policies

Answer 15

Support for small and medium-sized enterprises or firms
Support for infant industries

Question 16

True or false? All demand side policies only have demand side effects

Answer 16

False. Some demand-side policies can also have supply-side effects which have effects on long-term economic growth by increasing potential output

Question 17

What are the supply-side effects that demand-side policies can have?

Answer 17

They can create a stable economic environment as well as private investment and government spending which can lead to new capital formation, increased R&D and technology improvements, and improvements in labor force quality

Question 18

Constraints on market-based supply-side policies

Answer 18

Time lags
Possible unfavorable impact on unemployment
Possible negative effects on equity
Negative impacts on government budget
Possible interference of vested interests
Possible negative effects on the environment

Question 19

Constraints on interventionist supply-side policies

Answer 19

Time lags
Negative impact on the government budget

Question 20

Strengths of market-based supply-side policies

Answer 20

Improved resource allocation
May not burden the government budget
Ability to create employment
Ability to reduce inflationary pressure

Question 21

Strengths of interventionist supply-side policies

Answer 21

Direct support of sectors important for growth
Ability to create employment
Potential ability to reduce inflationary pressure
Possible positive effects on equity