supply side policies Flashcards

1
Q

Market based vs interventionsit policies

A

Market:
-allow free market to eliminate imbalances
-limit gov intervention
-forces of supply and demand

Interventionist:
-Rely on govenment intervention

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2
Q

What are supply side policies

A

-Aims to improve long-run productive capacity and efficiency of an economy

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3
Q

Create incentives - reduce income tax

A

Market:
-Reduce income and coorporation tax to encourage spending or investment - more disposable income

-Wage rate decrease
-Loss of gov revenue - could be spent elsewhere in economy
-Unemployment - not enough job availaility
-Depends on size of tax cut
-Cutting top tax rate affects few wealthy people - already in work - cutting lower ones will incentivise inactive people to get a job

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4
Q

Promote competition

A

Market:
-deregulating or privatising the public sector - firms can compete in a competitive market - improve economic efficiency

Int:
-Strict gov competition policy to reduce monopoly power and ensure smaller firms can compete too

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5
Q

Reform labour market

A

Int:
-Gov can increase geographical immobility of labour by subsidising reallocation of workers - improve availability of job vacancy information
-reduce frictional unemployment

Eval:
-Frictional unemployment is relatively small and insignificant

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6
Q

Improve skills and quality of labour force

A

Int:

-Increased opportunities and incentives for workers
-Increase in quality and productivity of workforce
-increase occupational mobility

-Subsidise training - lower cost for firms
-More spending on education - more skilled and efficient workers
-Increased spending on healthcare - improved quality of labour - more productive
-All leading to reduced occupational immobility of labour

-Time lags of education/ e.g. building a university
-Opp cost of gov spending - e.g. healthcare, reducing taxes
-SR supply of labour will fall - LR more skilled workers
-The subject field is important

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7
Q

Improve infrastructure

A

Int:
-Improve roads/schools

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8
Q

Strengths of SSP

A

-Only policies that can deal with structural unemployment - labour market can be directly improved with education and training

-Enhanced sustainable economic growth - increased productive capacity

-Reduced cost-push inflation - greater efficiency and productivity reduce COP

-Increase tax revenues in LR due to higher economic growth and lower spending on welfare benefits

-Industries becoming more competitive through lower costs and increased productivity reduces trade balance

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9
Q

Weaknesses of SSP

A

-Time lags - infrastructure projects, education improvements, R+D take years to yield results - not all policies will be successul - not a SR solution

-Increased inequality - tax cuts and deregulation can lead to a more unequal distribution of wealth - disproportionally benefit the wealthy

-Gov budgest worsens - high expenditure/ lower taxes - however there is a LR benefit

-Does not affect demand pull inflation

-If there is a lot of spare capacity in an economy there will be no effect - elastic part of keynsian

-Effectively running expansionary fiscal policy - conflict with fiscal position

-Depends where AD is in economy

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10
Q

RWE SSP

A

-Privatisation of Royal Mail in 2016
-Deregulation of UK retail energy market
-Tax free childcare - up to £2,000 a year

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11
Q

Create incentives - reduce corporation tax

A

-Increase retained profits for firms
-increase investment
-capital stock increases
-increase in quality and quantity of capital

Eval
-Firms may save rather than invest
-machines may replace human labour - structural unemployment - not at full capacity
-Depends on size of tax - enough to be compared to costs of capital
-Loss of gov rev
-Time lag between initial cut, investment, increase in productive capacity

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12
Q

create incentives/reform labour market:
reducing benefits, NMW

A

-increase opportunity cost of being out of work
-increase in supply of labour
-workers willing to accept lower wages
-fall in COP - firms may hire more workers
-Reduce NMW - free market forces allocates wages - labour market should clear
-Reduce trade union power - employing workers is less restrictive - labour mobility increased - more efficient LM

Eval:
-Fall in AD due to reduced consumption and gov spending
-May not be enough jobs
-may lack necessary skillset
-Increased levels of inequality - larger gap between poor and rich

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