Supply-side policies Flashcards
What are supply-side policies and what are their aims?
Supply-side policies are government actions designed to increase productivity and efficiency, shifting aggregate supply (AS) to the right and enabling long-term economic growth. They aim to enhance an economy’s productive capacity by improving labour market flexibility, encouraging investment, and promoting competition.
What are the two main types of supply-side policies?
Free-market supply-side policies seek to boost competitiveness and market efficiency, including measures like privatization, deregulation, lowering income taxes, and reducing trade union power.
Interventionist supply-side policies involve government intervention to correct market failures, such as increased spending on education, healthcare, transport, and communication infrastructure.
How do supply-side policies affect long-run aggregate supply (LRAS) and inflation?
Successful supply-side policies increase productivity, shifting LRAS to the right, allowing higher economic growth with lower inflationary pressures. Greater efficiency lowers production costs, which can reduce cost-push inflation.
How can tax changes as a supply-side policy impact the economy’s potential output and growth rate?
Reducing income and corporate taxes can enhance personal and business incentives to work, save, and invest. This can increase the labour force participation rate, encourage capital investment, and ultimately raise the economy’s potential output, contributing to a higher long-term trend rate of economic growth.
How can supply-side policies reduce unemployment?
Supply-side policies address structural and frictional unemployment by enhancing skills, improving job matching, and increasing flexibility in labour markets. Examples include training programs and reduced unemployment benefits, which encourage employment and help lower the natural rate of unemployment.
How do supply-side policies impact inflation?
By increasing the economy’s productive capacity, supply-side policies help contain inflationary pressures even as demand rises. For example, greater efficiency and productivity reduce production costs, keeping prices stable. A more flexible labour market can also reduce wage pressures, which further helps in managing inflation.
How do supply-side policies improve trade and the balance of payments?
Enhanced productivity and competitiveness make domestic goods and services more attractive in global markets, increasing exports and reducing reliance on imports. This strengthens the balance of payments on the current account by improving trade performance.
What role do supply-side policies play in reducing the natural rate of unemployment
Supply-side policies target structural issues in the labor market, such as skills mismatches and rigid wage structures. Policies like improved education, vocational training, and flexible labor market reforms lower the natural rate of unemployment by enhancing worker mobility and adaptability to industry needs.
What are examples of free market supply-side policies?
Tax reform, labour market reform and competition policy
What is tax reform?
Lowering income tax increases incentives for individuals to work more and reduce tax avoidance. Lowering corporation tax encourages business investment, innovation, and expansion by increasing the potential post-tax returns on investments, boosting economic growth.
What is Labour market Reform?
Reducing welfare benefits encourages job-seeking by reducing dependency on state support. Lowering minimum wages can make hiring more affordable for firms, particularly small businesses, potentially increasing employment rates. Reducing trade union power can make the labour market more flexible, reduce wage pressures, and enable firms to adapt more easily to economic conditions.
what is competition policy?
Policies such as privatization (transferring state-owned enterprises to the private sector) and deregulation (reducing restrictions on businesses) aim to increase competition, drive efficiency, and lower costs. Trade liberalization (reducing trade barriers) opens up markets to international competition, incentivizing domestic firms to improve productivity to remain competitive globally.
What are examples of interventionist supply-side policies?
Interventionist supply-side policies include government spending on education and training (to enhance workforce skills), infrastructure (for geographical immobility of labour), and subsidies to promote investment.
How do supply-side policies promote sustainable economic growth
By increasing LRAS, supply-side policies raise the economy’s sustainable growth rate without causing inflation. This occurs through improved labour productivity, higher efficiency, and enhanced capital investments, enabling the economy to grow more robustly over time.
How do tax reforms function as free-market supply-side policies?
Lowering income tax rates incentivizes greater labour participation and productivity. Cutting corporation tax enables businesses to retain more profits, which can be reinvested for growth and innovation. These reforms encourage work and investment, potentially raising aggregate supply and economic output.
