Supply + Demand Side Policies

Question 1

Supply Side vs. Demand Side policy?

Answer 1

Demand side focus on shifting AD e.g. fiscal and monetary policy
Supply Side focus on shifting AS e.g. free market policies and interventionist policies

Question 2

When do you use Demand Side vs. Supply Side.

Answer 2

Demand side important during recession or econ stagnation - work in SR e.g. when there is negative output Gap
Supply side important for LR increase in productivity

Question 3

Supply Side policies defintion

Answer 3

Government policies attempting to increase productivity in economy,
to Shift AS right enabling higher Econ Growth

Question 4

Two main types of Supply-side policy? + examples

Answer 4

1. Free Market Supply Side
   - Increase competitiveness in free market e.g. Privatisation, deregulation, lower income tax, reduced trade unions, reduce welfare ect.
2. Interventionist Supply-Side
   - government internvetion to overcome market failure e.g. gov spending on transport, education + training, infastructure even healthcare etc.

Question 5

Benefits of Supply Side Policies (4)

Answer 5

• Supply Side policies shift LRAS right,
  –> diagram of increase R. Output + decrease Price Level

1. Lower inflation
   - PL decreases help reduce cost-push inflation
   –> However, Phillips curve - lower inflation = higher unemployment
2. Lower unemployment
   - can reduce structural and real wage unemployment reducing natural rate of unemployment e.g. Interventionist = retraining, Hs2 / Free market = lower unemployment benefits
   –> However, Phillips curve - decrease in inflation cause increase in unemployment
3. Increase econ growth
   - shifting LRAS allows for increase econ growth without increasing inflaition
4. Improve trade + Balance of payments
   - Firms more productive + competitive means more exports

Question 6

Evaluation points for Supply-side policy?

Answer 6

1. Macroeconomic policy trade off
   –> between unemployment and inflation - use Phillips curve - low inflation means high unemployment (due to inverse relationship)
2. Private Sector
   - Productivity depends on private sector - limit to which gov can impact growth and working practises
3. Can be counter productive + unintended effects
   - e.g. flexible labour markets / decrease trade union power could cause job-insecurity and demotivated workers meaning productivity doesnt increase
   - since 2009, UK labour markets more flexible but productivity stagnant
4. Reccession - Supply-side policies do not influence AD - limit to their power
5. Time period - Supply side policies take long time to have effect e.g. education can take decades

Question 7

Monetary Policy vs. Fiscal policy

Answer 7

• Monetary influences econ activity - CB cutting interest rates - Monetary = Central bank
• Fiscal policy - cutting tax and increasing gov spending - Fiscal = government

Question 8

Effects of Monetary policy?

Answer 8

• Interest rates are cost of borrowing / reward for saving
• decrease cost of borrowing encourages investment + increases C
  –> reduces Opportunity Cost for spending
  –> Reduces mortgage payments

Question 9

What is Quantitative easing?

Answer 9

• increasing the money supply and buying bonds
  –> to lower interest rates and boost investment
• However, increase money supply could cause inflation

Question 10

Effects of Fiscal policy

Answer 10

• cutting tax
  –> increases disposable income, increasing C
• Gov spending
  –> creates jobs + Economic stimulus

However, leads to gov borrowing, increases budget deficit + government debt

Question 11

Evaluation for Demand Side policy?

Answer 11

1. Time period - increase or decrease in AD can be unsustainable in LR