Supply-side Policies

Question 1

What are Supply-side policies?

Answer 1

Policies designed to increase the productive capacity of the economy, shifting LRAS to the right.

Question 2

What are Interventionist Supply-side policies?

Answer 2

policies that require government intervention in order to increase the full employment level of output (LRAS).

Question 3

What are Market-based Supply-side policies?

Answer 3

Policies aimed to remove gov. involvement in the free market that are holding back improvements to LRAS.

Question 4

What are the objectives of Supply-side policies?

Answer 4

1) Improve incentives to work

2) To promote competition

3) To improve the skills and quality of the labor force

4) Provide a platform for sustained non-inflationary growth

5) Encourage innovation

Question 5

What are the Market-based Supply-side policies?

Answer 5

1.Cutting government spending and borrowing to reduce crowding out.

2.Lower business taxes to stimulate investment and lower income taxes to improve work incentives.

3.Reducing red-tape to cut the costs of doing business.

4.Measures to improve the flexibility of the labour market / reforming employment laws.

5.Policies to boost competition such as deregulation and tough anti-monopoly and anti-cartel laws.

6. Privatisation of state assets (selling off public sector businesses into the private sector).

7.Opening up an economy to overseas trade and investment.

Question 6

What are the Interventionist Supply-side policies?

Answer 6

1. State has key role in investing in public services and building critical infrastructure.
2. A commitment to a fair minimum wage / living wage to improve work incentives.
3. Active regional policy to boost under-performing areas / areas of high unemployment.
4. Some case for selective import controls to allow domestic industries to expand.
5. Management of the exchange rate to improve competitiveness of export industries.
6. Nationalisation of some key industries.

8.Stronger regulation of industries.

9. Eased borders.

Question 7

What are the objectives of Supply-Side policies?

Answer 7

1) To increase the number of Factors of production.

2) Increase the quality of factors of production.

3) Increase the productive efficiency.

Question 8

What happens if Supply-side polices work?

Answer 8

1) Sustained improvement in the possible trade-off between inflation and unemployment

2) Reduced unemployment by lowering the natural rate of unemployment (less frictional
+ structural)

3) All macro-objectives are improved.

Question 9

What are the drawbacks of Supply-Side policies?

Answer 9

1) Supply-side policies can have long time lags but this depends on the types of policies used (investment in education and school infrastructures = low time lag)

2) Might lead to greater inequalities of income and wealth - again it depends on which taxes are changed (e.g. cutting higher-rate income taxes, lowering minimum wage) = regressive

3) Budget deficits may be run to afford the investment. This expenditure has a huge opportunity cost and may lead to greater tax increases in the future, to offset the imbalance.

4) Sustainable and environmental concerns - Rapid growth and expansion may lead to the depletion of resources, the destruction of habitats, and an eventual fall in capacity.

5) No guarantee it will work

Question 10

What impacts the effectiveness of these policies?

Answer 10

1) The level and growth of aggregate demand are also important in making business investment and innovation viable.

2) Misjudged policies may not work.

Question 11

The main macroeconomic objectives of the government include?

Answer 11

Higher economic growth
Low inflation
Low unemployment
Equilibrium on the balance of payments

Question 12

How are supply-side policies likely to impact on the balance of payments current account and why?

Answer 12

• Improved supply means lower costs and cheaper goods. More competitive, more exports.
• New products can be developed that meet changing needs of global market
  So reduced deficit.

Question 13

What can effect the position of the NAIRU (make people work at the same/lower wage)?

Answer 13

• Reform the system of welfare benefits so as to reduce the risk of the “poverty trap”.
• Reforming trade unions to reduce their collective bargaining power and also reducing some of the barriers to labour mobility. Put up by professional bodies and associations which have the effect of limiting the supply of labour into an occupation.
• Reducing income tax to improve the incentives to look for and accept paid work
• Introduce policies that tackle regional u/e (investing in transport networks etc) or occupational (retraining programmes for the unemployed etc).