supply side policies

Question 1

define supply side policies?

Answer 1

policies designed to increase the productive capacity of the economy by shifting LRAS to the right

Question 2

how does the diagram look for LRAS shifting to the right?

Answer 2

• label the x-axis as Real GDP
• label the y-axis as Prices/level
• draw an AD curve pointing downwards
• then show LRAS1 shifting to the right to LRAS2
• when prices fall from p1 to p2
• increase in employment from yfe1 to yfe2

Question 3

what are the major reasons why LRAS might shift to the right?

Answer 3

• could be because of an increase in the quantity of CELL
• could be because of an increase in the quality of CELL
• increase in the productive efficiency where long-run cost of production falls

Question 4

interventionist- when there is government expenditure used for education and training what happens to LRAS?

Answer 4

for instance if the government decides to build new schools,training teachers or recruiting new teachers it will boost the skills of the workforce which will boost the quality of CELL.

Question 5

interventionist- gov expenditure on infrastructure what impact will it have on LRAS?

Answer 5

building new transport or improving the quality of existing roads and bridges, it will lower long-run cost of production which means businesses are able to access raw materials at a cheaper price so productive efficiency rises.

Question 6

interventionist-gov subsidy what impact will it have on LRAS?

Answer 6

this will promote investment since firms can use retained profits and use it for research and development it can increase quantity,quality and productive efficiency

Question 7

what is the point of market based policies?

Answer 7

to reduce the role of gov markets and become more free when operating

Question 8

explain how tax reforms help LRAS?

Answer 8

when there is low income tax- it will encourage workers to become more skilled and activity increase they will gain a higher disposable income causing the quality of CELL to improve

low corporation tax- if the firm has more retained profits they can use it for investment which can improve productive efficiency

Question 9

how does labour market reforms work for LRAS?

Answer 9

when there is a reduction in benefits-there is a strong incentive for inactive groups to start taking jobs which will increase the quantity of cell
reduction in minimum wages promote lower cost of production

Question 10

what are the evaluations for supply-side policies?

Answer 10

• no gurantee that it will work
• time consuming and expensive to set up these policies
• there will be time lags
• will only work when there is a boom