Macroeconomic policy (supply side policy) Flashcards
what curve does supply side policy shift and why ?
Long run aggregate supply
shifts this curve by increasing or decreasing factors of production.
increases in quantity, quality or improvement of productive efficiency( reductio in long run costs for a company)
definition of supply side policies ?
policies that influence the productivity and efficiency of the economy resulting in an improved (long run productive potential of the economy) due to an increase in factors of production
draw a LRAS shift graph ?
in
what are the aims of supply side policy ( what macroeconomic objectives does it achieve) ?
boot in LRAS: Economic growth, frictional and structural reduction of unemployment, reduction of cost push inflation.
compare supply side and fiscal policy.
supply side policy: More long term and there is more economic productive potential
fiscal policy: is more short term
how does opening up of markets improve efficiency of market and allocation of resources
the opening of markets to competition by reducing one or more barriers of entry, aim is to increase market supply, stimulate competition and innovation and drive prices down for consumers
Why does Supply side policy decrease (frictional and structural) unemployment
Why does supply side policy decrease cost push inflation/ long term rates of inflation
what are two groups of supply side policy
Interventionist:
Gov spending on education an training:
could be to build new schools, more teacher training, curricular reform (most skills of workers = improves productivity= boost in LRAS)
Gov spending on health care - boost productivity - improve quality labour
Gov spending on infrastructure:
transport infrastructure or upgrading transport ( roads, bridges, airports, air lines) this leads to long run production cots will reduce as it is easer and cheaper to access raw materials and sell goods and services is transport infrastructure improves - leads to more productive efficiency
New infrastructure ( schools, hospital building) increase the quantity of capital stock, stock is a factor of production there for increasing factor of production and shifting LRAS to the right.
subsidies - to promote investment ( new capital, tech, factory expansion) can improve quality and quantity of labour
what are the two main different types of supply side policy and the definitions go them
interventionist - promote more of a government role to boost LRAS
market based - reduce the government intervention/ role of gov allowing markets to be freer reaching the macroeconomic objectives - efficiency, productivity, competition, correct incentives
Increases in quantity, quality or improvement of
factors of production.
productive efficiency- reduce long run costs of production
free market
Taking away Government intervention
Tax reform:
lower income tax - incentive to enter Labour force and become active. increase quantity of labour boos LRAS
incentive to work harder, be more productive, earn more income (disposable) quality and quality of labour increase shift LRAS
Lower corporation tax: firms have more disposable income, more training and more investment to increase quality and quantity of capital stock and training to increase quality of labour.
Labour market reform:
reduction in benefits/ welfare payment cuts : strong incentive for economically inactive ( not working) to enter labour force increasing quantity of labour, size of labour force boost LRAS. This is because there is a decrease in financial security of unemployed.
Reduction in minimum wages: incentivise individuals to seek employment, increasing labour force participation rate and ultimately boosting economies productive capacity. this is because the costs of labour is lower for employers potentially leading to an increase in job availability as low labour cots make it more attractive for businesses to hire.
reduction in trade union power:
Competition policy:
Privatisation: Introducing Competition: By transferring state-owned assets to the private sector, privatisation aims to break up potential monopolies and introduce competition.
Profit Motive: Private firms, unlike state-owned entities, are driven by the profit motive, incentivising them to reduce costs, improve efficiency, and increase productivity to compete effectively.
deregulation: reduce gov intervention by fostering competition and efficiency which can lead to increased supply and lower prices
trade liberalisation: reducing or eliminating trade barriers like tariffs and quotas, fostering greater competition and efficiency, and potentially leading to lower costs and prices for consumers
Evaluation of supply side policy
No guarantee for success as subsides my not lead to business investment, increase in disposable finance due to cuts in corporation tax may not be used for investment either. competition policy may bot boos competition leading to policy failure resulting in a risk of wasteful spending on supply side policy as they are costly- especially interventionists supply side policies as expensive - if funded by borrowing could lead to debt and interest issues, opportunity cots.
Tax reforms carry a significant cost - reducing gov tax revenue.
very large time lags, for example: Gove infrastructure spending can take many years before infrastructure project is completed.
