macro 3.7 - supply side policies

Question 1

give the 5 main goals of supply side policies

Answer 1

• Long-term growth by increasing the economy’s productive capacity
• Improving competition and efficiency
• Reducing labour costs and unemployment through labour market flexibility
• Reducing inflation to improve international
  competitiveness
• Increasing firms’ incentives to invest in innovation by reducing costs

Question 1

define supply side policies and their goal

Answer 1

policies designed to increase the long-run aggregate supply in the economy by increasing the quantity/quality of factors of production

Question 2

give 3 types of market based policies

Answer 2

policies to encourage competition, labour market policies, incentive-related policies

Question 3

(1) policies to encourage competition

Answer 3

1. deregulation
2. privatization
3. trade liberalization
4. anti-monopoly regulation

Question 4

deregulation

Answer 4

• if governments have placed many regulations on the operations of businesses then this may increase their costs of production, thereby reducing potential output in the economy
• examples include environmental laws, health and safety regulations of laws concerning working hours, leave and holidays
• a reduction in no/severity of regulations will help to increase aggregate supply

Question 5

privatisation

Answer 5

• the sale of public government-owned firms to the private sectors may render them more efficient so may increase potential output of the economy
• nationalised firms tend to have goals such as maintenance of employment or provision of a service to an isolated market so may operate inefficiently

Question 6

trade liberalisation

Answer 6

• elimination of subsidies, tariffs, and quotas leads to free trade
• exporting firms need to be more efficient and increase investment in order to compete with foreign firms

Question 7

(2) labour market policies

Answer 7

1. reducing the power of labour unions
2. reducing unemployment benefits
3. abolishing minimum wages

Question 8

reducing the power of labour unions

Answer 8

this will reduce the ability of unions to negotiate higher costs of labour and therefore lower the costs of production to firms and increase the number of workers that firms may hire

Question 9

reducing unemployment benefits

Answer 9

people will have more of an incentive to find jobs that are available

Question 10

abolishing minimum wages

Answer 10

decrease cost of labour and increase aggregate supply

Question 11

(3) incentive-related policies

Answer 11

1. personal income tax cuts
2. cuts in business tax and capital gains tax

Question 12

personal income tax cuts

Answer 12

higher taxes may act as a disincentive to work, as people would prefer to substitute more work for more leisure time rather than pay higher taxes on the extra income. so if taxes are reduced people may work harder and be more productive

Question 13

cuts in business tax and capital gains tax

Answer 13

if businesses are able to keep more of their profits then they will have more money available for investment.
- research and development
- addition of capital stock to economy (increase in a factor of production )

Question 14

limitations of market based supply side policies

Answer 14

equity issues, time lags, vested interests, environmental impact

Question 15

equity issues

Answer 15

• labour market reforms may lead to a possible reduction in living standards for low-income or unionised workers
• reduction in household income taxes may benefit higher earners more than those on lower wages
• reduction in corporate taxes increases the net profits of companies so may lead to increased income inequality

leading to increased income inequality

Question 16

time lags

Answer 16

time lags involved before the effects of the policies are filtered through to increased potential outcome

Question 17

vested interests

Answer 17

if privatisation is not carried out in a transparent manner, and nationalised industries are sold below their true value to individuals with connections. also, the industries may enjoy monopoly power

Question 18

give 5 types of interventionist policies

Answer 18

• education, training
• improving quality, quantity and access to health care
• research and development
• provision of infrastructure
• industrial policies

Question 19

provision of infrastructure

Answer 19

infrastructure may be deformed as the large-scale capital which is needed for economic activity to take place.
includes roads, electricity, water supply, airports, internet and public transport

Question 20

industrial policies

Answer 20

developing policies that support and encourage the development of industry eg implementing anti-monopoly laws, supporting export companies, helping grow small and medium enterprises

Question 21

give 2 limitations of interventionist supply-side policies

Answer 21

costs:
- opportunity cost
- may increase govt debt
time lags

Question 22

Strengths of supply-side policies

Answer 22

Market based—improved resource allocation, no burden on government budget
Interventionist—direct support of sectors important for growth