Supply Side Policies

Question 1

Strengths of supply-side policies

Answer 1

Supply-side policies are the only policies which can deal with natural rate of unemployment, because the labour market can be directly improved with education
and training.

Improve current account as improved international competitiveness

Reduce cost-push inflation

Question 2

Weaknesses of supply-side policies

Answer 2

Demand-side policies are better at dealing with cyclical unemployment, since they can reduce the size of a negative output gap and shift the AD curve to the right.

There are significant time lags associated with supply-side policies.

Market-based supply-side policies, such as reducing the rate of tax, could lead to a more unequal distribution of wealth.

Deregulation can lead to excessive risk taking eg. Big bang in 1986 led to recesssion

Question 3

Free market supply-side policies

Answer 3

To increase incentives - Reducing income and corporation tax to encourage spending andinvestment. This could increase the long run productive potential of theeconomy, especially if labour and capital becomes more productive. This improves the underlying trend of economic growth.

To promote competition - By deregulating or privatising the public sector, firms can compete in a competitive market, which should also help improve economic efficiency

To reform the labour market - Reducing the NMW (or abolishing it altogether) will allow free market
forces to allocate wages and the labour market should clears. Reducing
trade union power makes employing workers less restrictive and it
increases the mobility of labour. This makes the labour market more
efficient.

Question 4

Interventionist supply-side policies:

Answer 4

To promote competition - A stricter government competition policy could help reduce the monopoly power of some firms and ensure smaller firms can compete

To improve skills and quality of the labour force :
The government could subsidise training or spend more on education.
This also lowers costs for firms, since they will have to train fewer
workers.
- Spending more on healthcare helps improve the quality of the labour
force, and contributes towards higher productivity.

To improve infrastructure
-Governments could spend more on infrastructure, such as improving
roads and schools.