supply and demand side Flashcards
what are supply side based policies
SUPPLY SIDE IS INCREASING ECONOMIC GROWTH BY INCREASING OUTPUT AND SHIFTING LRAS»_space;>
there is market based which is to alllow the free markert to raise its output
there is interventionist whihc is to intervene in the free market to correct failure
what to consider when looking at incentives to work
• Tax on income- tax discourages individuals to work, key is marginal tax rates, if they work overtime then how much less will they be taxed? Free market economists believe that the elasticity of the labour supply is high so decreasing tax by a small amount would increase labour by more
• Welfare benefits- if the benefits are too great then people would rather stay unemployed so rates of benefit must be cut
• Poverty and unemployment traps- if welfare benefits are taken away and an individual starts to work and be taxed etc they might end up being worse off or just slightly better
• Subsidising workers- subsidise workers for working overtime, low paid workers can claim income tax credits
• Tax on profit- large amounts of corporate tax are discouraging
Researching and development- could make things more efficient and subsidise some things
how to promote competition through supply side policies
• Privatisation- government run firms have little incentive to innovate so there is government failure, if you privatise you want the best or yourself
• Deregulation- process of removing government controls from market with the aim to encourage more firms to provide goods and services such as pollution quotas
• Competition policy- reducing prices and increasing competition should raise output and therefore more AS because things such as price-fixing and cartels are illegal.
Industrial policy- interventionist
how to reform the labour market
• Improving labour market flexibility- degree to which demand and supply in labour respond to external changes, geographical flexibility, functional and wage flexibility, moving in-between jobs
• Trade unions- organises workers, prevents sellers competing against each other
• Migration
Minimum wages- higher the wage rate, less is the demand for workers from employers
improving child care provision, france did that to enoucrgae more children to help its dying populaton
general advantages of supply side policies
causes less conflict between macro objectives
distribution of income may improve bc more productive on a whole
general disads of supply side
very costly- budget deficit!
trade unions may be threatened by labour market reforms, causes changing patterns in trade
depends on elasticty of AD curve
eval for market based policies
reduce inflationary pressure because of efficiency and productivity (market based) but then phillips curve- lower empoloyment
takes very long to improve quality of workforce and become more productive- new people to train each year
privatisation would increase inequality
cutting corp tax useless unless they invest it
may lead to monopolies and change in market structure if too much privaisation
eval for interventionist policies
real jobs and sustainable growth, improve BoP (interventionist)
be wary of tax increases, laffer curve
crowding out in the private sector
takes very long to improve quality of workforce and become more productive- new people to train each year
describe monetary policy
Monetary policy- the manipulation by government of monetary variables, such as interest rates and the money supply, to achieve its objectives
Expansionary monetary policy- policy which leads to a rise in AD
Deflationary monetary policy- policy which leads to a fall in AD
describe fiscal policy
Fiscal policy- use of taxes, government spending and government borrowing by government to achieve its objectives
Expansionary fiscal policy- policy which leads to a rise in AD
Deflationary fiscal policy- policy which leads to a fall in AD
what is affected by monetary policy
• Interest rates, can affect- housing, wealth, investment, exchange rate
○ If low interest rates then lower cost of borrowing, more borrowing occurs, more investment and consumption and so C and I increase and so does AD
• Money supply
• Quantitative easing
describe QE
Quantitative easing- where the bank creates money to invest into assets, money is being spent and it goes around
○ If interest rates are very low and the Bank’s Monetary Policy Committee expects inflation to fall below the Government’s 2% target, it can inject money directly into the economy to boost spending. This is quantitative easing.
○ The Bank of England creates new money electronically to buy financial assets like government bonds. People get return on these assets that the BoE buys and that should give them more money, spend more and increase money supply in economy. Often the money goes to the richer families. This cash injection lowers the cost of borrowing because the yields are lower and boosts asset prices to support spending and get inflation back to target.
If inflation looks like being too high, the Bank of England can sell these assets to reduce the amount of money and spending in the economy
what is affected by fiscal polciy
• Government spending
• Taxation
They could decrease tax which leaves you with more disposable, more consumption, investment rises too, AD increases, Marginal Propensity of Consumption would increase
indirect vs direct taxation
Direct taxation-tax levied on individual or organisation e.g. Corporation tax, income tax
Indirect taxation- tax levied on goods and services rather than income or profit e.g. VAT, sales tax, excise duties
Demand side policy in the great depression:
Fiscal- US increased spending dramatically where money was spent on infrastructure
UK was more focused on balancing the government budget
Monetary- US tried to increase money supply
UK had to abandon the gold standard which meant exchange rate fell by 25%, improving international competitiveness
