Module 14 - Supply - side policy

Question 1

Supply-side policies

Answer 1

Supply-side policies are designed to increase aggregate supply directly, ie independently of aggregate demand, by increasing the quantity of factors of production and improving their productivity.

Question 2

Discuss the aims of supply-side policies [3]

Answer 2

1. Reduce unemployment
2. Reduce inflation
3. Increase a country’s output and its rate of economic growth.

Question 3

Describe the ways in which productivity can be measured [3]

Answer 3

1. Output per worker
2. Output per hour worked
3. Total factor productivity

Question 4

Describe the main determinants of productivity [7]

Answer 4

1. Private investment in new physical capital (machinery and buildings) and in R+D
2. Public investment in education, R+D and infastructure
3. Training of the workforce
4. Innovation and the application of new technology
5. Management of factors of production
6. The creation of new firms (which generally have higher productivity than older firms)
7. Competitive pressures to improve quality and reduce costs.

Question 5

Distinguish between the two types of supply-side policy

Answer 5

1. Market orientated supply side policies
   Encouraging private entrerprise or rewarding hard work.
2. Interventionist supply side policies
   Counteract deficiencies of the free market.

Question 6

Market-orientated supply-side policies

Answer 6

The aim of market-oriented supply side policeis is to increase the output of the economy by increasing the role of markets and decreasing the role of government. These policies concentrate on “freeing up” markets by reducing government intervention and regulation, and encouraging private enterprise and competition.

Question 7

Describe the following market-orientated supply-side policies and discuss their effectiveness:

• reducing government expenditure
• tax cuts
• reducing the power of labour
• reducing welfare
• encouraging competition
• reducing and simplifying regulations

Answer 7

.

Question 8

Interventionist supply-side policies

Answer 8

The aim of interventionist supply side policies is to increase the output of the economy by government intervention that addresses the failure of the free market.

Question 9

Explain why interventionist policies are thought necessary [5]

Answer 9

The rationale for interventionist supply side policies stems from the failure of the free market to provide sufficient R+D, training and investment because:

• firms free ride on the investment of other firms
• there are substantial external benefits, so that the social rate of return on such investments exceeds the private rate of return
• firms consider such investments too risky
• firms have too much monopoly power
• finance might be difficult to obtain as a result of banks’ reluctance to lend and shareholders’ interest in short-term, rather than long-term, profitability.

Question 10

Give examples of interventionist supply-side policy [8]

Answer 10

1. Nationalisation
2. Direct provision of capital
3. R+D
4. Training and education
5. Investment
6. Assistance to small firms
7. Advice and persuasion
8. Information

Question 11

Market oriented supply-side policies to encourage competition [5]

Answer 11

1. Privatisation
2. Deregulation
3. Introducing market relationships into the public sector
4. Public-private partnerships (PPPs)
5. Free trade and capita movements