June Test

Question 1

Supply-side policies

Answer 1

Policies designed to improve the long-run capacity of the economy by improving the quantity and/or quality of the factors of production.

Question 2

Bottlenecks

Answer 2

Supply-side constraints in a particular market in an economy which prevent higher growth for the whole economy.

Question 3

Deregulation

Answer 3

The process of removing government controls from markets

Question 4

Industrial policy

Answer 4

Government policy to promote and support individual firms which it considers important for the growth rate of the economy.

Question 5

Interventionist policies

Answer 5

Active government involvement to correct market failures and develop the productive capacities of an economy.

E.g. government infrastructure projects and policies to improve education and training.

Question 6

Labour market flexibility

Answer 6

The degree to which demand and supply in a labour market respond to external changes (such as changes in demand for a product or in population size) to return the market to equilibrium.

Question 7

Market-based policies

Answer 7

Policies which remove obstructions to the efficient functioning of the free market, aiming to promote entrepreneurship, incentives and competition.
 E.g. tackling labour market rigidities and reducing taxes to promote incentives.

Question 8

Minimum wage

Answer 8

The least amount an employer can legally pay one of its workers, usually expressed as an hourly wage rate.

Question 9

Poverty or earnings trap

Answer 9

Occurs when an individual is little better off or even worse off when gaining an increase in wages because of the combined effect of increased tax and benefit withdrawal.

Question 10

Privatisation

Answer 10

The sale of government organisations or assets to the private sector.

Question 11

Red-tape

Answer 11

Rules and regulations issued by government which must adhere to in order to operate legally.

Question 12

Supply-side economics

Answer 12

The study of how changes in AS will affect variables such as national income in particular, how government microeconomic policy might change AS through individual markets.

Question 13

Unemployment trap

Answer 13

Occurs when an individual is little better off or even worse off when getting a job after being unemployed because of the combined effect of increased tax and benefit withdrawal.

Question 14

Supply-side

Answer 14

Refers to the ability of an economy to produce goods and services

Question 15

Policies to improve Labour Markets

Answer 15

Supply-side policies which successfully improve the working of the labour market will lead to an improvement in the productivity of the labour force, which will allow the UK economy to potentially produce more goods and services.

Productivity is a measure of the efficiency of the labour force and is measured by output per worker or output per worker hour.

Higher productivity can lead to lower costs for firms, which might be passed onto consumers in lower prices, encouraging higher demand, more output, and an increase in employment through this derived demand for labour.

Improved productivity leads to improved competitiveness and trade performance.

Better productivity also leads to higher profits.

Question 16

Tackling trade union power

Answer 16

Trade unions use collective bargaining and essentially try to monopolise the supply of labour.

They use their power of industrial action to enforce standards such as increased wages, reduced working hours, and improved working conditions.

The Trade Union Act 2016 ensures that industrial action only ever goes ahead when there had been a ballot turnout of at least 50%. In important public services, including health, education and transport, an additional threshold of 40% of support to take industrial action from all eligible members must be met for the action to be legal.

Question 17

Tackling the occupational immobility of labour

Answer 17

Occupational immobility occurs when there are barriers to the mobility of factors of production between different industries leading to these factors remaining unemployed, or being used inefficiently.

In 2016, Qatar abolished the controversial ‘kafala’ labour system; a sponsorship system used in the Arab World in which employers will sponsor migrant worker so that they can come into a country and work. However, it significantly restricts the mobility of the worker unless approved by the sponsor, who can forbid them from leaving for better employment.

Question 18

Minimum Wage Reform

Answer 18

As of April 2019, the National Minimum Wage is currently £8.21 for workers over 25; it has been has been instrumental in reducing the pay gap between the low and high paid.

While it only directly raised the pay of 5% of workers, ‘spill-over’ effects on wages above he minimum mean that up to 25% of workers benefited from the minimum wage.

It is argued that increasing the minimum wage increases the incentive to work, therefore expanding the labour supply. It also improves industrial relations as workers become motivated, happier and wealthier. Hence, this would increase productivity.

On the other hand, scrapping the MP would decrease real-wage unemployment as due to increased wage flexibility.

In addition, COP for firms, subsequently causing a potential fall in price level and a higher level of output for firms.

Question 19

General Welfare and Benefits Reform

Answer 19

In April 2013, the Government introduced a cap on the total amount of benefit that working-age people can receive.

The cap is £350 for a single adult and £500 for a couple a week.

Reducing the amount of benefits that people can claim is designed to entice people back into the labour market, and therefore increase the supply of labour. The new regime is known as Universal Credit.

On the other hand, UC has been riddled with problems. A fifth of claimants’ payments were delayed and a quarter of new claimants are forced to wait up to 4 weeks before receiving their money.

Question 20

Reduced levels of Income Tax

Answer 20

This increases the opportunity cost of not working and will therefore encourage more people to join the labour force, or encourage existing workers to work increased hours.
This increases the supply of labour and therefore increases the potential output of the economy.

From April 2019, the standard Personal Allowance increased to £12,500, with the higher rate tax threshold increasing to £50,000.

Question 21

Policies to improve education

Answer 21

Improves technical knowhow, numeracy, literacy and communication skills.

Addresses structural unemployment as it gives workers the basic skills to move into any profession.

Increased investment into STEM education may improve the number of science and technology graduates, improving the quality of the labour supply.

The Education and Skills Act 2005 raised the minimum age at which a person can exit education or training to 18 years of age.

Question 22

Policies to improve training

Answer 22

Job specific and so focuses on the needs of industry, tackling structural unemployment and decreasing the natural rate of unemployment.

UK Industrial Strategy White Paper: create a new National Retraining Scheme that supports people to re-skill, beginning with a £64 million investment for digital and construction training.

However, government training schemes have been notoriously ineffective, as well as being very expensive on the government.

In addition, age discrimination is a major barrier to employment opportunities as well.

Question 23

Policies to promote Competition

Answer 23

The main competition regulator in the UK is the Competition and Markets Authority (CMA) which has the role of tackling banned anti-competitive practices by firms who hold a dominant market position, such as collusional price-fixing and predatory pricing, and exclusivity contracts.

Companies breaching EU and UK competition rules risk hefty fines of up to 10% of global turnover and senior executives risk jail-time.

Question 24

Policies to promote Competition (Privatisation)

Answer 24

Private firms are viewed as more efficient than public-sector firms due to the fact that private firms are motivated by a profit incentive whilst the government is concerned about pursuing social and political objectives, leading it to make decisions that are not always in the best economic interests of the state-owned firms.

Also, employees in nationalised firms tend to be less productive because they are aware that their firms are essentially underwritten by the state, which accepts liability for their losses, and so their survival isn’t dependent on success.

E.g. the British Telecommunications Act 1981 provided for the privatisation of British Telecom and enabled other operators to run telecommunications systems also, ending BT’s monopoly over the industry.

Question 25

Policies to promote Competition (Deregulation) 1

Answer 25

o Cutting red-tape means that there are fewer costly administrative processes that firms have to go through.

This improves efficiency and entrepreneurialism.

E.g. In New Zealand, it takes only 2-days to register a business

Industrial policy: A package of supply-side policies targeted at certain industries.

Question 26

Policies to promote Competition (Deregulation) 2

Answer 26

Enterprise Zones are designated areas across England that provide tax breaks and Government support and are part of the Government’s wider Industrial Strategy to support businesses and enable local economic growth.

E.g. Aerohub Cornwall; 2 investment-ready development sites dedicated to cutting-edge aerospace and space business.

Question 27

Policies to improve Incentives

Answer 27

General Welfare and Benefits Reform

Reduced levels of Income Tax

Tax credits: Top-up working incomes at the very lower levels so that there is always the incentive to work rather than claim benefits.

Question 28

Policies to promote Entrepreneurship

Answer 28

UK Industrial Strategy White Paper:
Measures to stimulate business start-ups: Seed corn finance (funds invested in SMEs) and other help for new enterprises can help new businesses get started.

Raise total research and development (R&D) investment to 2.4% of GDP by 2027.

Increase the rate of R&D tax credit to 12%.

Question 29

Policies to promote infrastructure

Answer 29

Support electric vehicles through £400 million charging infrastructure investment and an extra £100 million to extend the plug-in care grant.

Boost digital infrastructure with over £1 billion of public investment, including £176m for 5G and £200m for local areas to encourage a roll-out of full-fibre networks.