Supply Side Policies Flashcards
Define Supply Side policy
Policies that improve the productive capacity of the economy. Right shift in LRAS
What policies involve in increase in government spending?
Spending on transport infrastructure
Spending on education
Is government spending interventionist or market based?
Interventionist
What is the chain of analysis for an increase in government spending on transport infrastructure?
- Decreases the geographical immobility of labour
- Decreases the NRU
- increases the supply of labour
- Increases the productive capacity of the economy
- Increases LRAS
- (also increases AD and thus triggers the multiplier)
What is the chain of analysis for an increase in government spending on education?
- Increases availability and quality skills and qualifications available
- Increases the quality of labour
- Increases labour productivity
- Increases the productive capacity of the economy
- Increases LRAS
- (also increases AD, the multiplier, and SRAS)
Is a cut in tax considered an interventionist or market based strategy?
Market Based
What is the chain of analysis for a cut in corporation tax?
- Increase in retained business profits
- Increase in business investment due to increased ability to fund it
- Increases the capital stock of the economy
- Increases the productive capacity of the economy
- Increases LRAS
- (also increases SRAS due to lower costs of production)
- (also increases AD due to increased investment and thus triggers the multiplier)
What is the chain of analysis for a cut in income tax?
- Increases the incentive to work as makes the opportunity cost of working over leisure time greater
- Decreases the NRU
- Increases the size of the labour force
- Increases the productive capacity of the economy
- Increases LRAS
- (also increases AD as there is an increase in consumption when households’ disposable income rises and more people work and have a disposable income to spend)
Is deregulation considered interventionist or market based?
Market based
What is the chain of analysis for deregulation?
- Lowers barriers to entry into markets
- Increases competition
- Increases business efficiency
- Increases productive capacity of the economy
- Increases LRAS
- (also increases SRAS as business costs will fall as business efficiency rises)
Is privatisation considered interventionist or market based?
Market based
What is the chain of analysis for privatisation?
- Opens market to new competition from new businesses
- Increases competition
- Increases business efficiency
- Increases productive capacity of the economy
- Increases LRAS
How can reduction in the Natural Rate of Unemployment (NRU) lead to an increase in LRAS?
- Decrease in NRU
- Increases the size of the labour force
- Increases productive capacity of the economy
- Increases LRAS
What 2 types of unemployment make up the NRU?
Structural unemployment + frictional unemployment
Why is the NRU considered ‘voluntary unemployment’?
As these people remain unemployed as they are not willing to work at the current equilibrium wage rate.
Policies that reduce the NRU will work in 1 of 2 ways, what are they?
- Increase the incentive to work or decrease the disincentive to work
- Decrease structural + frictional unemployment
What policies could be used to increase the incentive to work or decrease the disincentive to work?
- Cut in income tax
- Cut in welfare / benefit payments
- Increase the National Living Wage (NLW)
What policies could be used to decrease structural and frictional unemployment?
- Increase in gov. spending on transport infrastructure
- Decrease in house price differentials - will cause regional unemployment to fall as housing becomes equally reasonable in all areas, including those of low and high unemployment
- Increase in the quality and quantity of job availability systems which will speed up job search and reduce time spent unemployed (indeed.com, etc)
What are the limitations of supply side policies?
- Time lag - all SS policies take a long time to have an effect. Policies like education spending may take 20-30 years to have an effect on the economy
- Counter productive - flexible labour markets reduce costs for business, however if they cause job insecurity, workers may become demotivated and labour productivity stagnates
Lead to a fall in structural u/e however a stagnant level of labour productivity. - Productivity growth depends largely on private enterprise and trends in technological innovation - There is a limit to which the government can accelerate the growth of tech. change and improvements in working practices
- opportunity cost of spending on policies rather than elsewhere
How can increased flexibility of labour markets lead to an increase in LRAS?
- deregulation of labour markets through methods such as
- abolish redundancy pay or right of appeal, leading to easier to hire and fire workers
- reduce maximum working weeks and minimum holiday pay
- enable zero-hour contracts, allowing firms to employ when demand is high
- This leads to it being cheaper for firms to hire and fire, which will incentivise firms to employ and lower NRU and an increased LRAS
