Supply side Policies 2.6.3

Question 1

what are supply side policies

Answer 1

Supply side policies are government policies aimed at increasing the productive potential of the economy and moving the supply curve to the right. Over time, there tend to be supply-side improvements independent of the government, through actions of the private
sector such as investment. However, the government is able to use supply-side policies in order to increase and speed up these improvements.

Question 2

Interventionist policies

Answer 2

Interventionist policies are policies designed to correct market failure, for example the free market under provides education and so the government provides it. Also, firms may only look into the short term and look to maximise short run profits to give to shareholders instead of investing, so governments may take actions to encourage
investment.

Question 3

what will cutting corporation tax lead to

Answer 3

this increases the incentive for people to go to work or firms to employ people, the government will increase the size of the workforce and this would mean more goods and services would be produced.
However a small change in tax such as 25% to 20% will have a little impact on peoples incentive to work. Reduction of tax on high income earners will leas to inequality and any reduction will mean that the government will have less revenue, increasing there borrowing and spending less. Reducing benefits will also worsen equity.

Question 4

Evaluation of supply side policy

Answer 4

● Unlike demand-side policies, supply side policies are able to both increase output and decrease prices.
● They are more long-term policies and lead to long term economic growth, rather than small changes in economic growth following changes in AD.
●Moreover, not all supply side policies work at actually increasing supply, whilst others cause conflicts and both these issues vary depending on which policies are used.
● Often, the government has to spend more money (for example on education) or decrease taxes, which will decrease their revenue and lead to a budget deficit.
● These actions may also have undesirable impacts on AD and could cause higher unemployment or higher inflation.
● Supply side policies can also take a long time to have any effect on output and this makes them less useful.