Macro Economic Policies

Question 1

What are supply side policies?

Answer 1

Supply side policies aim for economic growth, lower unemployment, stable prices, and trade balance. These affect SRAS and LRAS.

Market based supply side policies: aim to limit government intervention and increase competitiveness among private sectors driven by the invisible hand.

• privatization (increase competitiveness however it can lead to monopolies)
• Promoting the flexibility of labour market which includes abolishing minimal wages, limiting labour unions, etc ( increases efficiency but can harm workers’ rights. It can also exacerbate income inequality )
• Reduced taxation (leads to greater potential output but can exacerbate income inequality)

Reduction in government policies ( increase potential output but can lead to environmental issues and other social issues)

Interventionalist supply side policies: aims to have government intervention in particular sectors of the economy and help market failures.
- Investment in research and development (opportunity cost, budget deficient; long term growth)

• Education and training ( reduce structural unemployment but also comes with price of opportunity cost)
• Investments in infrastructure ( opportunity costs; can improve long term growth and reduce unemployment)

These policies however can experience time lags in order to reap the full rewards.

Question 2

What is mpc?

Answer 2

Marginal propensity to consume measures how much more an individual will spend for every additional dollar of income. This is an injection

Question 3

What is mps?

Answer 3

Marginal propensity to save measures how much an individual will save for every additional dollar of income.

Question 4

What is mpi?

Answer 4

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