Supply-side policies

Question 1

What are supply-side policies?

Answer 1

A range of measures aimed at directly shifting the AS curve to the right thereby boosting the productive capacity of the economy.

Question 2

What does a rightwards shift in the AS curve lead to?

Answer 2

More growth and reduced inflationary pressures.

Question 3

What is the problem with fiscal policy and monetary policy?

Answer 3

They have trade-offs associated with them as they increase real output however they also increase inflationary pressures.

Question 4

Why will no extra output be able to be made unless the AS curve shifts out?

Answer 4

AD will just move further up the AS curve.

Question 5

What are some examples of supply-side polices?

Answer 5

Increase retirement age, lower income tax, deregulation (remove health and safety laws), reduce benefits, improvements in education and training, increase work visas, more research and development and privatisation.

Question 6

How does privatising inefficient state-owned industries lead to an increase in AS?

Answer 6

There is a profit motive meaning that there is an incentive to improve quality, cut costs or to find innovative ways to boost productivity.

Question 7

What is the problem with industries being state-owned?

Answer 7

They are usually a monopoly so any rises in the costs of production are easily passed onto consumers in the form of higher prices.

Question 8

How does privatising inefficient state-owned industries lead to an increase in AS?

Answer 8

There is a profit motive meaning that there is an incentive to improve quality, cut costs or to find innovative ways to boost productivity. This increases the competitiveness of UK goods and services.

Question 9

What is the problem with industries being state-owned?

Answer 9

They are usually a monopoly so any rises in the costs of production are easily passed onto consumers in the form of higher prices.

Question 10

What are some evaluation points about privatisation?

Answer 10

Very little industries are owned by the government so few can be sold off to the private sector. Also, firms may be too profit motive driven to the point where they don’t consider things such as safety in order to cut the costs of production and some industries may just become private monopolies so inefficiencies may persist and when coupled with the profit motive, it may simply lead to higher prices.

Question 11

How does deregulation lead to an increase in AS?

Answer 11

It opens up firms to market discipline by inviting new firms to enter the industry thereby stimulating competition, this competition should encourage firms to raise productivity in order to cut their unit labour costs and therefore their prices and to improve the quality, choice and innovativeness of their products.

Question 12

What is deregulation?

Answer 12

This involves the removal of old rules that prevent competition in a particular market.

Question 13

What are some evaluation points about deregulation?

Answer 13

The more firms there are in an industry, the more likely it is that wasteful advertising will be necessary as each firm tries to maintain a lead on its rivals. This would raise the costs of production and undermine the aim of deregulation and consumer choice is not always a good thing as it isn’t necessary sometimes.

Question 14

How does a cut in corporation tax lead to an increase in AS?

Answer 14

It leaves firms with greater net profits which they can use to increase their capital stock or to increase research and development spending which will raise quality and technological innovation.

Question 15

How does a cut in corporation tax lead to an increase in AS?

Answer 15

It leaves firms with greater net profits which they can use to increase their capital stock or to increase research and development spending which will raise quality and technological innovation.

Question 16

What are some evaluation points about cuts in corporation tax?

Answer 16

Tax cuts alone may not be enough to guarantee an expansion of the UK’s productive capacity. Some firms may choose to redistribute their higher profits back to their shareholders instead.

Question 17

How does education and training lead to an increase in AS?

Answer 17

Education initiatives aim to boost literacy, numeracy and vocational skills thereby raising the productivity of the future workforce. This increase the output capacity and reduces unit labour cost. It can also enhance particular skills and therefore, the quality and technological innovation associated with UK goods and services.

Question 18

What are some evaluation points about education and training?

Answer 18

There are lengthy time lags involved as it may take more than 20 years before a sufficient number of students have acquired the right skills, graduated through the education system and joined the workforce.

Question 19

What are some evaluation points about education and training?

Answer 19

There are lengthy time lags involved as it may take more than 20 years before a sufficient number of students have acquired the right skills, graduated through the education system and joined the workforce.

Question 20

How can issuing work visas lead to an increase in AS?

Answer 20

When there is a labour shortage in a particular area, foreign workers with the right skills and experience are invited to apply for jobs and if they are successful then they are invited to live and work in Britain. This boosts the quantity of labour and intensify competition in the labour market and drive down wages thereby reducing the costs of production.

Question 21

What are some evaluation points about work visas?

Answer 21

So many foreigners have been given work visas which means that there has been a reduced skills shortage and issuing work visas to non-EU residents is less urgent than it was before.

Question 22

What is the problem with trade unions?

Answer 22

Trade unions had too much bargaining powers and could influence managers really easily which undermined productivity levels. There were also too many strikes occurring and so the amount of power that trade unions have now has dramatically been reduced through the introduction of new laws.

Question 23

How can trade union reform lead to an increase in AS?

Answer 23

It has boosted the productivity of labour as staff are spending more time at work and less time striking and it has prevented huge pay settlements as trade unions are no longer in a position to make unreasonable wage demands.

Question 24

What are some evaluation points about trade unions?

Answer 24

Their bargaining power is already weakened and their membership is lower than at any point - unions are looking for partnerships with employers rather than confrontations. Any further weakening may lead to workers being under-represented and therefore open to exploitation.

Question 25

How does reform of income tax and benefits lead to an increase in AS?

Answer 25

They increase work incentives thereby boosting the quantity of labour.

Question 26

What has happened to income tax and benefits in the recent years?

Answer 26

Income tax has generally fallen and it has become increasingly difficult to get benefits.

Question 27

What are some evaluation points about the reform of income tax and benefits?

Answer 27

It can undermine the redistribution of income objective as cuts in income tax often have to be compensated by a rise in indirect taxes which are inherently regressive. Furthermore, tightening benefit rules may leave the poorer, unskilled people in society with no income at all as they struggle to find a job but may fail to qualify for benefits.

Question 28

What are some evaluation points about the reform of income tax and benefits?

Answer 28

It can undermine the redistribution of income objective as cuts in income tax often have to be compensated by a rise in indirect taxes which are inherently regressive. Furthermore, tightening benefit rules may leave the poorer, unskilled people in society with no income at all as they struggle to find a job but may fail to qualify for benefits.

Question 29

What is a general evaluation point about supply side policies?

Answer 29

They involve increased government spending which may also increase the AD curve therefore the effects on the macroeconomic objectives may be more or less significant than originally expected.

Question 30

Why are supply-side policies important?

Answer 30

They provide the platform for long-term growth, more productivity means there will be better living standards, they allow the economy to grow without inflation, there is more competition which lowers prices, they make the UK more competitive on global markets and the increased tax revenues can fund state spending.