Supply-side polices

Question 1

What are the two types of supply-side policy?

Answer 1

Interventionist policy
Market-based policy

Question 2

Define market-based policy

Answer 2

Limit government intervention, and allow the free market to eliminate imbalances. The forces of supply and demand are used

Question 3

Define interventionist policies

Answer 3

Policies that rely on the government intervening in the market

Question 4

What are supply side polices for?

Answer 4

To improve the long-run productive potential of the economy

Question 5

3 pros of market base policies

Answer 5

o To increase incentives

• Reducing income and corporation tax to encourage spending and
  investment.

o To promote competition

• By deregulating or privatising the public sector, firms can compete in a
  competitive market, which should also help improve economic efficiency.

o To reform the labour market

• Reducing the NMW will allow free market
  forces to allocate wages. Reducing
  trade union power makes employing workers less restrictive and it increases the mobility of labour. This makes the labour market more
  efficient.

Question 6

What are the effects of employing supply-side polices on the economy and a Keynesian LRAS diagram?

Answer 6

LRAS curve shifts right showing an increase in the productive potential of an economy

• the maximum output of an economy at full employment increases

LRAS shifts right , fall in average price level, increasing national output

Question 7

Pro of supply-side polices

Answer 7

Supply-side polices are the only polices that can deal with structural unemployment, because that labour market can be directly improved with education and training

Question 8

Cons of supply-side polices

Answer 8

There are significant time lags with supply-side polices

Demand-side polices are better at dealing with cyclical unemployment as they can reduce the size of a negative output gap and increase AD to the right

Market-based polices such as reducing the rate of tax could lead to a more unequal distribution of wealth

Question 9

Define supply side policies

Answer 9

Measures aimed at boosting long-term economic growth by enhancing efficiency and promoting investment. These policies primarily concentrate on shifting the long-term aggregate supply curve out to the right.

Question 10

Define the two types of supply-side policies

Answer 10

Market based polices - appal to free market economist who believe economic success depends on reducing the role of the state and allowing markets to work as freely as possible

Interventionist polices - require government intervention to correct market failure and appeal to economists who do not believe free markets always produce the best outcome

Answer 11

Increasing incentives

• people go to work more and firms want to employ more which leads to a bigger workforce meaning more goods and services are produced
• reducing benefits/taxes increases opportunity cost of not being in work as to why gov have introduced universal credit to help ease the transition of work