Supply-side Policies

Question 1

What are supply-side policies used for?

Answer 1

To increase the productive potential of the economy and shift the LRAS to the right.

Question 2

What is a market based supply side policy?

Answer 2

Allows markets to work more freely with minimal government intervention.

Question 3

What is an interventionist supply side policy?

Answer 3

Governments provide capital goods and services where it is believed the market has failed to provide them.

Question 4

What do market based supply-side polices include?

Answer 4

Policies to Increase competition,
Labour market reforms,
Incentive related policies.

Question 5

Why use policies to increase competition?

Answer 5

Greater competition means greater efficiency, leading to a larger output which can be produced with the same amount of resources. Could also lead to better quality, innovation and lower prices.

Question 6

Market Based policies: Policies to increase competition - deregulation.

Answer 6

Reducing the number and severity of policies on a firm, reduces the costs of production for firms. Don’t have to spend time or money to comply with rules.

Question 7

Market Based policies: Policies to increase competition - Anti-monopoly regulation

Answer 7

Prevents domestic monopolies for increased competition, thus more choice and lower prices for consumers.

Question 8

Market Based policies: Policies to increase competition - trade liberalisation

Answer 8

Encourages specialisation, trade and increased no. of goods and services.

Question 9

Market Based policies: Policies to increase competition - privatisation.

Answer 9

The sale of state owned industries to the private sector. They can be more efficient because they need to make a profit, so there will be less resources for the same output, so average costs of production falls.

Question 10

Why use labour market reforms?

Answer 10

They are designed to make markets more responsive to supply and demand so level of employment will increase and productivity will rise.

Question 11

Market Based policies: labour market reforms - reducing trade union power

Answer 11

Trade union: group of workers joining together to further their own interests with regards to pay and working conditions. Often result with wages above equilibrium and lower levels of productivity. Reducing their powers = higher levels of employment, higher productivity. Workers can be made redundant more easily so they can move between employers easily.

Question 12

Market Based policies: labour market reforms - ending/reducing the national minimal wage.

Answer 12

It will enable firms to hire more workers and produce more output.

Question 13

Market Based policies: labour market reforms - reducing unemployment benefits

Answer 13

If there is a cut of unemployment benefits or the duration for which they are available shortened to encourage people to accept jobs.

Question 14

Market Based policies: incentive related policies - reducing income tax.

Answer 14

Incentive for workers to work longer/harder as they can keep a higher proportion of their income. Could increase productivity. However many individuals do not have the opportunity to alter their hours in response to a tax change due to contracts.

Question 15

Market Based policies: incentive related policies - reducing corporate taxes

Answer 15

The firms will have more funds for investment. Can also now have more reserve and development.

Question 16

Evaluation of market based policies:

Answer 16

Increased inequality: low income earners/the unemployed may find incomes falling relative to others in society. (Cutting income tax which is progressive)
Increased negative externalities: from reduced regulations
Decrease in tax revenue

Question 17

What implications do interventionists supply-side polices have?

Answer 17

Spending by the government represents an addition to AD, as well as impacting productivity and total output which will increase AS.

Question 18

Interventionist supply-side policy: investment in Human capital

Answer 18

Education: govs. providing a free/subsidised education with making regular changes to the curriculum. It will improve skills and productivity of the workforce increasing productivity.
Training: giving subsides to firms to training workers, helping retired workers to update their skills.
Health services: free or subsidised health care.

Question 19

Interventionist supply-side polices: Investment in new technology

Answer 19

Encourage R and D by offering tax incentives e.g not paying corporation tax in profits used for R and D. Govs. can also sponsor R and D.

Question 20

Interventionist supply-side polices: Investment in infrastructure

Answer 20

Building large scale public projects e.g highways, bridges, communication networks.
It will increase the countries output and it will become cheaper/easier to produce/transport finished products.

Question 21

Interventionist supply-side polices: Industrial policies

Answer 21

Govs. have agencies supporting/encouraging the development of industry.
E.g financial incentives (subsidised loans, reduced corporation tax rates) and advice for small firms.
Infant industry: new firm that doesn’t produce enough to benefit from economies of scale. Thus has higher average costs of production compared to their competitors. Govs can use tariffs to protect this firm to give it time to compete on the world market.

Question 22

Evaluation of Interventionist supply-side polices

Answer 22

Time lags: demand side effects may be felt quickly however the supply-side effect may take years to have an impact.
Budget constraints: limited by government budget and their ability borrow money. Also the opportunity cost of what the money could of been spent of.

Question 23

Evaluation of supply-side policies as a whole

Answer 23

Keynesian perspective: increasing in AS won’t result in an increase in real output and economic growth.