Supply Side Policies

Question 1

Define Supply Side policy

Answer 1

Policies that improve the productive capacity of the economy. Right shift in LRAS

Question 2

What policies involve in increase in government spending?

Answer 2

Spending on transport infrastructure

Spending on education

Question 3

Is government spending interventionist or market based?

Answer 3

Interventionist

Question 4

What is the chain of analysis for an increase in government spending on transport infrastructure?

Answer 4

• 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)

Question 5

What is the chain of analysis for an increase in government spending on education?

Answer 5

• 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)

Question 6

Is a cut in tax considered an interventionist or market based strategy?

Answer 6

Market Based

Question 7

What is the chain of analysis for a cut in corporation tax?

Answer 7

• 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)

Question 8

What is the chain of analysis for a cut in income tax?

Answer 8

• 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)

Question 9

Is deregulation considered interventionist or market based?

Answer 9

Market based

Question 10

What is the chain of analysis for deregulation?

Answer 10

• 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)

Question 11

Is privatisation considered interventionist or market based?

Answer 11

Market based

Question 12

What is the chain of analysis for privatisation?

Answer 12

• Opens market to new competition from new businesses
• Increases competition
• Increases business efficiency
• Increases productive capacity of the economy
• Increases LRAS

Question 13

How can reduction in the Natural Rate of Unemployment (NRU) lead to an increase in LRAS?

Answer 13

• Decrease in NRU
• Increases the size of the labour force
• Increases productive capacity of the economy
• Increases LRAS

Question 14

What 2 types of unemployment make up the NRU?

Answer 14

Structural unemployment + frictional unemployment

Question 15

Why is the NRU considered ‘voluntary unemployment’?

Answer 15

As these people remain unemployed as they are not willing to work at the current equilibrium wage rate.

Question 16

Policies that reduce the NRU will work in 1 of 2 ways, what are they?

Answer 16

• Increase the incentive to work or decrease the disincentive to work
• Decrease structural + frictional unemployment

Question 17

What policies could be used to increase the incentive to work or decrease the disincentive to work?

Answer 17

• Cut in income tax
• Cut in welfare / benefit payments
• Increase the National Living Wage (NLW)

Question 18

What policies could be used to decrease structural and frictional unemployment?

Answer 18

• 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)

Question 19

What are the limitations of supply side policies?

Answer 19

• 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

Question 20

How can increased flexibility of labour markets lead to an increase in LRAS?

Answer 20

• 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