Supply- Side policies

Question 1

Define supply-side policies

Answer 1

Market-based or interventionist policies aimed at increasing the productive capacity of an economy

Question 2

What are the goals of supply-side policies?

Answer 2

1. Expand productive capacity of the economy and accelerate long-term growth
2. Increase the degree of competition in product markets
3. Reduce wage and non-wage labour costs for firms
4. Improve firms incentives to invest in new capacity and new innovative technologies
5. Reduce risk of inflation

Question 3

List all the policies that product market policies would enforce

Answer 3

1. Anti-monopoly regulation
2. Deregulation
3. Privatization
4. Trade liberation

Question 4

Define privatization

Answer 4

The transfer of state-owned assets to the private sector

Question 5

Define trade liberalization

Answer 5

Policies that aim to decrease or eliminate trade barriers

Question 6

Define deregulation

Answer 6

When the government decreases or eliminates regulations on the operation of industries that are hoped to have a positive supply effect on the effect on the economy

Question 7

List all the policies of labour market policies

Answer 7

1. Reducing the power of labour unions
2. Decreasing or abolishing the minimum wage
3. Reducing non-wage labour costs
4. Decreasing unemployment benefits

Question 8

List all the policies of incentive-related policies

Answer 8

1. Cutting personal income tax

2. Cutting business taxes and the capital gains tax

Question 9

What are examples of interventionist supply-side policies?

Answer 9

Increased government spending on 1. Education, training and healthcare
2. Infrastructure
3. R and D
Industrial policies

Question 10

What are demand-side effects of supply-side policies?

Answer 10

1. All interventionist supply-side policies that call for public investments in infrastructure, health care, education and R&D activities also increase AD in the short term
2. Tax cuts aimed at improving incentive to work and to invest increase AD
3. If personal income taxes decrease household consumption increases and so AD increase
4. Corporate tax cutes increase AD

Question 11

What are supply-side effect of fiscal and monetary policies?

Answer 11

1. If in fiscal policy there is spending on infastructure, health care, education and R&D not only will AD increase but also AS
2. If a corporate tax succeeds in increasing investment spending, AD increasas and AS increases as a result of increase in capital

Question 12

What are strengths of market-based supply-side policies?

Answer 12

Improves resource allocation

Minimal burdens on the government’s budget

Question 13

What are drawbacks of market-based supply-side policies?

Answer 13

1. Increased income inequality- benefits of tax cuts accrued to the wealthiest
2. Long time lags- takes years to see the effect of privatization
3. Deregulation of environmental rules that may worsen pollution and accelerate climate change
4. Vested interests that may stall or even block their implementation

Question 14

What are strengths of interventionist supply-side policies?

Answer 14

1. Affect factors critical for accelerating growth

2. Affect industries which are considered critical to drive growth