Supply Side Policies

Question 1

Definition Market Based Supply Side policies

Answer 1

A set of policies based on well-functioning competitive markets in order to promote long-term economic growth, shown by increase in long-run aggregate supply. (goal is to promote long term economic growth)

Question 2

Definition Interventionist Supply Side Policies

Answer 2

A set of policies that aim to increase an economy’s productive capacity that relies on a greater role for the government; these include expenditures on infrastructure, education, health care, research and developement, and all industrial policies. (goal is to promote long term economic growth)

Question 3

Goal of Market Based

Answer 3

Policies to Encourage Competition
Policies to make Labor Markets more flexible
Policies to increase Incentives

Question 4

Market Based Policies Diagram

Answer 4

New Classical
LRAS
SRAS
AD

Question 5

Market Based Explanation of Diagram

Answer 5

The goal of Supply Side Policies is to increase the economy’s productive capacity and promote long term growth. In the diagram market based policy policy is being employed in the economy. LRAS SRAS and AD are all shifting to the right as Yp increased from Yp1 to Yp2. Real GDP is now at a higher level and the economy’s productive capacity has increased.
Emphasize that:
SRAS is shifting to the right because potencial real output is increasing form Yp1 to Yp2
AD is shifting to the right because supply side policies are increasing the productive capacity of the economy and therefore decreasing inflationary pressures
Average price level did not increase because market based policy was able to shift AS to the right.

Question 6

Goal of Interventionist

Answer 6

Polices to improve Education and Training
Policies to improve quality, quantity and access to Healthcare
Policies to encourage Research and Development
Policesto Provide Infrastructure
Industrial Policies

Question 7

Interventionist Policies Diagram

Answer 7

Keynesian
AS
AD

Question 8

Interventionist Explanation of Diagram

Answer 8

The goal of Supply Side Policies is to increase the economy’s productive capacity and promote long term growth. In the diagram interventionist policy is being employed in the economy. AS and AD are shifting to the right as Yp shifts from Yp1 to Yp2.
Emphasize that
SRAS is shifting to the right because potencial real output is increasing form Yp1 to Yp2
AD is shifting to the right because supply side policies are increasing the productive capacity of the economy and therefore decreasing inflationary pressures
Average price level did not increase because interventionist policy was able to shift AS to the right.

Question 9

Market Based Advantages and Limitations

Answer 9

The advantages:
Improve resource allocation, generally lead to more competitive and efficient markets
No burden on government budget, generally do not burnden the government with expenditure
The Limitations:
Equity issues which can lead to unfair outcomes
Long time lags between adopting a policy and seeing results
Vested intrest (personal stake) can lead to corrupt business influence on policies
Environmental impact, deregulation can lead to outcomes that are environmentally unsustainable

Question 10

Interventionist Advantages and Limitations

Answer 10

The advantages:
Direct support for sectors important for growth, can be targeted and foccus on directly supporting sectors that are important for growth
The Limitations:
Costly, add a hughe burden on government budget and entail a high opportunity cost
Long time lag between policy implementation and seeing its result