supply side policies

Question 1

define supply-side policy

define aggregate supply

Answer 1

: policies used by the government to increase aggregate supply
: total amount of goods and services produced in a country at a given price level in a given time period
- tend to be business-friendly aim to increase economic growth, achieve all 4 macro

factors affecting: quantity, quality & productive efficiency ( lower long run costs)
improve productivity of production factors, resources used more efficiently greater productive potential by using ssp economy expands/grows unemployment lower & inflationary pressure ease long-term

Question 2

improve productivity - (graph) price level against real gdp

Answer 2

• improving flexibility
• government investment into education/training - quality of workforce/labour will improve help labour productivity due to skills + more employable, skilled labour increase agg supply
• more investment purchase new technology efficiency will improve increasing productivity
• gov spending on healthcare boost productivity less sick days improving quality of labour
• privatisation and deregulation help to make markets more competitive putting pressure on firms to be more cost-effective and innovative raising productivity

Question 3

education

Answer 3

• quality of human capital improved workers are more productive - develop range of skills making them more employable, more confident increase labour mobility occupationally transferrable skills, specialisation
• invest in school, unis provide firms with incentive for training offset costs against tax or subsiding

AO4 = very expensive, time lag returns on investment not seen for years, funds for education often inadequate e.g. developing country families pay for uniforms, books

Question 4

infrastructure spending

Answer 4

• productive potential will increase if quality of infrastructure improves
• investing will improve transport and communication systems
• improve labour mobility regionally/geographically reducing structural unemployment benefitting firms as distribution of goods and access to raw materials is easier lowering long-run average costs - benefit from external eos
• upgrade roads, railways, airports, internet - buildings schools hospitals

Question 5

subsidies - given to firms to promote investment

Answer 5

target firms spending on R&D, buying/upgrading capital
new technology - investment increase quantity and quality of capital helps to keep long-term average costs lower benefitting consumers increase agg supply

Question 6

tax reform

Answer 6

low income tax encourage working - inactive provides incentive to enter labour market increasing quantity of labour, incentive to work harder more productive earn higher income more DI boost quality of labour /
inverse - discourage businesses setting up, entrepreneurs take less risky opportunities reduce incentive to work

lower corporation tax - funds available for investment accelerate economic growth, taxing profits less more funds available for investment, firms can offset cost of investment against tax - claim capital allowances when buying machines eq e.g. - tax incentives encourage people to save more buy shares in company tax relief sometimes to individuals who invest in new companies
/ increase quantity/quality of labour tech increase agg supply

Question 7

labour market

Answer 7

reduce benefits incentive to work increase quantity/ reduce min wage, reduce trade union power lower long run cost to firm increase productive efficiency increase - agg supply

Question 8

competition policy

Answer 8

privatisation - competitive pressure force firms to be cost efficient increasing productive efficiency, innovative improve quality and reduce prices - no longer rely on public money profit to survive
/ state monopolies become private monopolies results in consumers exploited - price increases poor quality

deregulation - excessive paperwork, unnecessary licenses, increased bureaucracy lots of people to approve, trivial rules slow down development / relaxing regulation that restrict competition

Question 9

Evaluation of SSP

Answer 9

1) no guarantee of success - boost productivity?
2) (opportunity) cost / alternative - even in tax
3) large time lags
4) negative stakeholder effects e.g. deregulation (worker, consumer, environment safety)
5) depends on output gap - where in economic cycle (recession no boom yes)
6) need for targeted supply side policies
- combination of policy often most effective

Question 10

Policies to boost regions with high unemployment

Answer 10

education, infrastructure projects, subsidies - combination best

Question 11

total output impact

Answer 11

• increase productive potential of the economy, national income/GDP and living standards improve
• gov increase supply less likely demand-pull inflation more jobs created unemployment lower

shown on ppc shifting outwards increase quantity of both consumer and capital goods - increasing aggregate supply