Supply Side Policies

Question 1

Supply Side policies to improve QQT

Answer 1

Increase in quantity of labour: Reduce income tax rates so as to encourage more people to find work because of higher disposable incomes. Relaxing immigration policy to encourage the greater inflow of labour. Raising retirement age to allow workers to stay longer in the workforce. When more workers join the labour force and are employed, production increases, growth takes place.

Increase quantity of capital stock: Tax incentives and cut in corporate tax may encourage higher investment. Reducing corporate profit tax would allow firms to keep more of profits they earn, incentivising them to undertake new investments. This also encourages FDI, that brings in faster growth in productivity and output per capita.

Government spending to spur research and development and improve human capital and infrastructure: Tax incentives to R&D can be given to encourage more firms to fine tune their processes and to be more efficient in their production. Helping to encourage greater productivity growth.

Question 2

Supply Side Policies to increase efficiency and remove barriers

Answer 2

Policy to reduce welfare benefits: increase the returns from working and reduce the returns from not working. Aimed to encourage the unemployed to find work as quickly as possible.

Reducing red tape and other obstacles for start ups and risk taking. This reduces the costs of starting up businesses.

Question 3

Limitations of Supply side policy: Long Time frame and Uncertain Outcome

Answer 3

Supply side policies require long-term structural changes to be made to increase AS in the economy. They have little relevance in the short-term.

Question 4

Limitations of Supply Side Policy: Higher Expenditure incurred by the Government

Answer 4

Investment in infrastructure and manpower means higher expenditure incurred by the government. Thus in some cases, government may need to prioritise and postpone investment projects due to insufficient government budget. Options present a tradeoff and may result in unintended consequences which may reduce the effectiveness of supply side policies.

Question 5

Limitations of Supply Side Policy: Difficult to change attitudes and mindsets of workers

Answer 5

There could be difficulty in changing people’s attitudes and mindsets, particularly towards retraining or switching jobs. Workers may be unwilling to switch occupations or may be unwilling to retrain, or it might be difficult to learn new skills.

Question 6

Limitations of Supply Side Policy: Inaccurate or unavailable information

Answer 6

Manpower and budget planning is difficult given the difficulty to accurately predict or forecast the economy’s needs in the future. Given the rate of technological advancement, the economic structure of the country could change more rapidly than anticipated.

Question 7

Limitations of Prices and Income Policy

Answer 7

Such policy requires the support of trade unions and firms. Firms can get around price controls by redefining products or trade unions can bargain for other increases indirectly related to basic wage.

Policy tend to be temporary measure against inflation and is difficult to maintain in the long run. Once removed, there may be an escalation of prices as people try to make up for loss of real income.

Policy may lead to inefficient allocation of resources. It distorts the workings of the market mechanism as relative prices may have changed due to changes in demand and supply conditions in the market. Such a policy may cause inefficiency, reduce growth and increase unemployment.