MACRO - LS13 - Supply-Side Policies (Part 1)

Question 1

Supply-side policies

Answer 1

• Designed to increase productive capacity of the economy
• Increases factors of production
• Shifts LRAS to the right/outward shift of PPF

Question 2

Where do supply side policies originate?

Answer 2

• Usually in private sector - independent of government
• gov can attempt to further increase output through supply-side policies
• can act throughout economy or in certain markets to remove ‘bottlenecks’ that prevent economy from growing faster
• mainly work through impact on individual markets, therefore aim to improve microeconomic preformance which then improves macroeconomic preformance

Question 3

Two types of supply side policies

Answer 3

Market based
Interventionist

Question 4

Market based policies

Answer 4

• Designed to remove barriers to the efficient working of market, the barriers limit output and raise prices
• in long term reduces file of government

Question 5

Interventionist policies

Answer 5

• Designed to correct market failure
• gov intervening in free markets to change the outcome from that which it would otherwise have been
• gov intervene to increase LRAS
• promotes role of the government

Question 6

Interventionist policies

Answer 6

• invest in human capital:education & health services
• invest in tech
• invest in infrastructure

Question 7

invest in human capital: education & health services

Answer 7

• an increase in quantity and quality of training improves quality of labour
• education also has positive externalities, justifying intervention
• training and education programmes can make workers more employable - reduces unemployment- can set up retraining programmes for those structurally unemployed
• more people move onto higher education due to grants, low-interest loans, offer subsidies to firms, assisting workers to relocate to areas with higher labour demand
• if workers can access good quality healthcare then more productive, increases quality of labour

Question 8

Investment in infrastructure

Answer 8

• many types are merit or public goods - justifies government intervention
• can build or upgrade infrastructure - increases efficiency - lowers material costs - cheaper & easier to access and sell
• improves labour productivity
• increases AD short term but AS over long term
• industrial policies - support growth of industrial sector of an economy - all policies above and below are
• Support for SME’s - can be by tax exemptions, low-interest loans, grants etc.. - supports private sector increasing efficiency, more capital, employment
• support for infant industries - newly emerging industries in developing countries - can receive grants, subsidies, tax exemptions etc…
• investment in infrastructure can help increase the quantity of the capital stock

Question 9

Investment in new tech

Answer 9

• Can increase quantity and quality of capital
• can increase productivity
• R&D is an example
• has positive externalities, justifying government intervention
• can be through tax incentives, subsidies, patents to protect inventions

Question 10

Market policies

Answer 10

• encouraging competition
• labour market reforms
• incentive related policies

Question 11

Incentive related policies

Answer 11

• lowering income tax - leads to higher incomes after tax, incentive for people to work, increases number of hours worked and people interested in finding work, a decrease in unemployment- shifts LRAS to right
• lowering taxes on capital gains and interest rates - capital gains are taxes on financial investment, if reduced, more likely to save for investment
• lowering business taxes - increases level of profit after taxes, more financial resources for investment and technological innovations through R&D

Question 12

Labour market reforms

Answer 12

• intend to make labour market more competitive, lower labour costs and increase employment, lower labour courts can lead to increased profits - leads to more investment, R&D, growth etc..
• abolishing minimum wage - causes equilibrium wage to fall, so lower unemployment as more hired at low wage, more profit, investment growth etc…
• weakening trade union power - if loads of power then secure higher wages, so if weaker wages more likely to fall if there is unemployment
• reducing unemployment benefits - have unintended consequences of reducing incentive to look for work - so unemployment for longer then necessary, so by reducing benefits, it would encourage them to look for work
• reducing job security - makes it easier and less costly to let go of workers, increase employment as likely to hire new workers if they know they can fire them, decreases labour costs etc…

Question 13

Encouraging competition

Answer 13

• means firms have to reduce costs, increase productivity to survive in long term - shifts LRAS to right
• privatisation - ownership goes from public to private sector - can increase efficiency due to better management/operation, gov firms often inefficient due to bureaucracy, admin costs, unproductive workers etc….
• deregulation - eliminating/reducing gov regulation of private sector activities as it stifles competition and increases inefficency - two types: economic & social
  Economic regulation - gov controls prices, output & other activities, protects them from competition
  Social regulation - protect consumers against undesirable private sector effects in sectors like food, healthcare, product safety etc…
  -private financing of public projects - they build, finance and operate public services, are owned by them, gov buys services from them - increases competition as compete to be selected for project
• outsourcing to private sector - compete to get gov contracts
• restricting monopoly power - increases efficiency, productivity etc…