SUPPLY-SIDE POLICIES

Question 1

define supply side policies (SSPs)

Answer 1

policies designed to increase productive capacity of the economy in order to shift LRAS right to meet the macro objectives

Question 2

forms of interventionism

Answer 2

• gov spend on education and training= recruit more teachers, build more schools etc
  = more skills= more productive= better quality of labour
• gov spend on infrastructure= better transport= lower LR COP= easier and cheaper access to raw materials
• subsidies given to firms= target firms to invest on R+D, capital etc= increase quantity and qual of goods= lower LR COP= shift LRAS outwards

Question 3

forms of market based SSPs
= All lead to either increase in quantity, qual or productivity to shit LRAS right

Answer 3

• lower income tax= incentivise inactive to enter labour force= increase quantity of labour= increase LRAS
• lower corporate tax= firms have higher retained profits= spend profit on investments
• reduce benefits= incentive for economically inactive to work
  = increase productive efficiency
• privatisation and deregulation= aim to increase competition across economy= firms will have to lower LR COP in order to survive competition
  = LRAS shift right

Question 4

EVALUATE effectiveness of SSPs

Answer 4

• no guarantee of success
• expensive= danger of wasteful spending
• long time lags= eg building an entire new building takes years
• negative stakeholder impacts= changes to incomes can impact SOL= might not be interest of society
• size of output gap effects the effectiveness

Question 5

disadvantage of educational SSP policies

Answer 5

• time lags between initial investment and benefits, eg. if gov invested in building a new uni, it would take many years for it to be built
• opportunity cost of gov money eg. could have spent the money on healthcare or reducing taxes
• subject Field= effect of education will be very limited if it leads to an increase in people taking insignificant courses like Surf Science

Question 6

disadvantage of low income tax

Answer 6

• increase in supply of labour might decrease the wage rate, which has the opposite effect
• will be a reduction in tax revenue, so there may be less money to be spent in improving the productive capacity elsewhere in the economy
• might not be enough jobs available to accommodate the increase in supply of labour, so there might be high unemployment levels