Chapter 28: Supply side policy

Question 1

Supply side policies

Answer 1

Measures designed to increase aggregate supply and hence increase productive potential

• Seek to increase the quantity and quality of resources
• Raise the efficiency of product and factor markets

Question 2

Improving education and training

Answer 2

• Designed to increase skill of workers
• Workers would be more productive
• Higher labour productivity can reduce costs of production and raise the quality of products
• More skillful workers are likley to be occupationally mobile meaning that supply would adjust more quickly to changes in demand

Limitations:
- Possiblity that the education and training may not be in the right areas

Question 3

Lowering direct taxes and increasing incentives

Answer 3

• Cutting direct taxes increases the incentive to work
• Reducing income tax rates will increase the reward from working especially if combined with a cut in unemployment benefits - makes the unemployed search for work more actively
• Cutting corporation tax may increase the incentive to invest

Limitation:
- Some workers may respond to lower income tax by working fewer hours
- Increasing incentives will nto be effective if there are no jobs available
- Cutting unemployment benefits could make unemployment worse - fall in aggregate demand and so output and employment
- If firms lack confidence, they still may not invest
- A firm deciding whether to invest takes into account of confidence, advances in technology, etc

Question 4

Deregulation

Answer 4

• Reduction or elimination of rules and regulations
• Remove barriers to entry to markets and to reduce the costs of complying with the rules and regulations
• Reducing the cost of the government of regulating the industries and occupations affected
• Increases competition, increase efficiency, and so lower costs of production and prices

Limitations:
- Does not guarantee that a monopoly will not develop
- Imposing restrictions on who can undertake particular occupations may protect customers

Question 5

Privatisation

Answer 5

• Seeks to increase competition and efficiency by increasing the role of market forces
• Increases productive capacity if private sector firms invest more and work more efficiently than state owned enterprises

Limitation:
- Does not ensure greater competition
- Monopoly may develop
- Less inclined to take into account of social costs and benefits
- May be more willing to make workers redundant

Question 6

Labour market reforms

Answer 6

• Designed to make labour markets work more efficiently
• Increase quality, quantity, and flexibility of labour
• Making it easier for employers to hire and fire workers - efficiency of labour markets - easier for firms to adjust their supply to changing market conditions
• Reform of trade unions - makes labour more productive - less inclined to engage in industrial action if power is reduced

Limitations:
- Firms may spend as much on training their workers if they think the workers may not be with them for long
- Reducing power of trade union reduces benefits of trade unions - workers unproductive and unhappy

Question 7

Subsidies

Answer 7

• Subsidised to buy new capital equipment

Limitations:
- Firms may become dependent on subsidies

Question 8

Effects of supply side policy on macroeconomic aims

Answer 8

• Increasing supply enables economy to grow in a non inflationary way
• ## Increasing productive potential and efficiency can improve an economy’s balance of payments position - better quality and cheaper products can increase exports and decrease imports