SUPPLY SIDE POLICIES

Question 1

What are Supply Side Policies?

Answer 1

Policies designed to increase the productive capacity of the economy

Question 2

General Cons/Evaluation of Supply Side Policies

Answer 2

• No Guarantee of Success; spending may be done in inefficient areas - how are Subsidies really being used? - How are retained business profits being used?
• Can be very Expensive; tax burden on Future Generations? Crowding Out?
• Time Lags; Infrastructure projects take time, those benefitting from spending on Education and Training actually have to finish School/Training before Economy benefits from increased productivity
• Need to be targeted at specific areas
• Mainly useful in BOOM or near full employment, not in Recession due to lots of spare capacity

Question 3

General Advantages of Supply Side Policies

Answer 3

• Increased Quantity of Factors of Production
• Increased Quality of Factors of Production
• Decreased LR Costs of Production so more Productive Efficiency

Question 4

What are Interventionist Supply Side Policies?

Answer 4

Policies that involve government intervention being used to influence the supply side of the economy

Question 5

Main examples of Interventionist Supply Side Policy

Answer 5

• Increased Government Spending on Education and Training
• Increased Government Spending on Healthcare
• Increased Government Spending on Infrastructure
• R&D Subsidies

Question 6

Effect of Increased Gov’t Spending on Education and Training

Answer 6

• Will improve the human capital of future workers and increase the productivity of the labour force
• Increased LRAS and Economic Growth

Question 7

Evaluation of Gov’t Spending on Education and Training

Answer 7

• Long Term Policy which will take time to have its effects on the economy
• More people in Uni and less working; SRAS decrease
• Some courses will not improve the productivity of workers; might be better to be selective of which courses receive funding

Question 8

Effects of Gov’t Spending on Healthcare

Answer 8

• Improves the quality and quantity of labour available in the economy due to a healthier workforce and less people taking time off through illness and injury
• LRAS and Economic Growth increases

Question 9

Evaluation of Gov’t Spending on Healthcare

Answer 9

• Spending may be inefficiently used on Bureaucracy and other things rather than being used on improved capital

Question 10

Effect of Gov’t Spending on Infrastructure

Answer 10

• (E.g HS2 Line) Improved transport infrastructure will improve the geographical mobility of labour and will make the transportation of goods and services being bought and sold quicker
• LRAS and GDP increase and Unemployment decreases

Question 11

Evaluation of Gov’t Spending on Infrastructure

Answer 11

• Can lead to ‘Crowding Out’ as Infrastructure spending uses up Factors of Production and leaves little for Private Sector Investment
• Time lags as Infrastructure projects take a long time

Question 12

Effects of R&D Subsidies

Answer 12

• Can improve the quantity and quality of capital employed by firms and can increase their productivity by decreasing LR Costs of Production
• Can also allow for better research quality and innovation by firms to improve the productive capacity of the economy

Question 13

Evaluation of R&D Subsidies

Answer 13

• Depends on how effectively subsidies are used by these firms; may be used to cover debt or pay shareholders

Question 14

What are Market Based Supply side Policies?

Answer 14

Policies that remove or reduce government intervention and promote greater free market operation

Question 15

Main Example of Market-Based Supply Side Policies

Answer 15

• Tax Reform; Lower Income Tax & Lower Corporation Tax
• Labour Market Reform; Reduced Benefits and Minimum Wage, Relaxed Immigration Controls and Reduction in Trade Union Power
• Competition Policy; Privatisation, Deregulation and Anti-Monopoly Legislation

Question 16

Effect of Tax Reform

Answer 16

• Lower Income Tax - Incentivises people to enter the workforce and for people working to work harder as more of Income can be taken home; Increased Capacity of the Labour Force and Improved Quality and Productivity of Labour
• Lower Corporation Tax - Firms have more retained profits and may use these profits for R&D / Capital Investment to increase efficiency and make the firm more productive

Question 17

Evaluation of Tax Reform

Answer 17

• ‘Income Effect’ - Some people only need a certain an amount of money to maintain lifestyle so may supply less labour
• Depends on how firms use these retained profits
• May take long time for R&D benefits to come through
• Decreased Gov’t Tax Revenue; decreased Public Expenditure

Question 18

Effect of Labour Market Reform

Answer 18

• Reduced Benefits - Incentivises people to pursue work not welfare; Increased Capacity of Workforce
• Reduced Minimum Wage and Trade Union Power - Decreases LR Cost of Production of firms as they no longer have to pay such high wages; LRAS increase
• Relaxed Immigration Controls - Allows for more inflow of foreign workers who can contribute to productivity

Question 19

Evaluation of Labour Market Reform

Answer 19

• (Benefits) - Also, frees up money for Gov’t spending elsewhere
• (Min/TU) - May cause workers to leave due to poor wages and working conditions; can decrease living standards
• (Immigration) - Could put a strain on Public Services and many people entering may not be productive or able to work i.e. Children, Older People, Pregnant Women

Question 20

Effects of Competition Policy + Evaluation

Answer 20

• Incentivises Increased Productive and Dynamic Efficiency to reduce costs and improve product quality in markets in order to remain competitive and battle for market share AND to have more competitive exports

Question 21

Evaluation of Competition Policy

Answer 21

• Where are deregulatory measures being placed? Can they affect important aspects like health and safety?

Question 22

SSPs to boost Potential Growth

Answer 22

Take Your Pick But I’d say mainly:
- GS on Education and Training
- GS on Infrastructure
- R&D Subsidies
- Privatisation & Deregulation
- Relax Immigration Controls

Question 23

SSPs to decrease Economic Inactivity

Answer 23

• GS on Healthcare - Will decrease levels of Long-Term Illness and number of people physically and mentally unable to work
• GS on Infrastructure - Could improve the geographical mobility of labour and allow for more flexibility in where people are able to work
• GS on Childcare - Will allow for more parents to return to workforce following childbirth
• Reduced Income Tax and Benefits - Will force/incentivise the inactive to seek employment as there is now more money in work

Question 24

SSPs to reduce the Natural Rate of Unemployment (Unemployment when market is in equilibrium; Voluntary, Frictional, Seasonal, Structural)

Answer 24

• GS on Education and Training - Will equip labour force with wider range of skills; more occupationally mobile and adaptable to changing structure of the economy
• GS on Infrastructure - Improved Geographical Mobility of Labour in case of changes to where labour is demanded AND Widens search radius of where people are able to work; reducing search times for jobs and Frictional Unemployment

Question 25

SSPs to boost Productivity, International Competitiveness and reduce a Current Account Deficit

Answer 25

• GS on Education & Training + Healthcare - Increase the human capital of labour and keep workers healthier allowing for higher productivity
• R&D Subsidies + Decreased Corporation Tax - Will allow for more dynamic efficiency and incentivise cost-cutting and Productivity Efficiency as more profits can be retained; Improving International Competitiveness
• Relaxed Immigration Controls - Allows for more potential workers to enter the country and contribute to productivity
• Any Competition Policy - Will increase competition in markets; promoting increased Efficiency and International Competitiveness