Supply-side policies

Question 1

What are the 4 main macroeconomic objectives

Answer 1

1. Low and stable inflation 2. Low unemployment 3. Economic growth 4. Balance in current account

Question 2

What do supply side policies do?

Answer 2

They increase the productive capacity (LRAS) of an economy by increasing the quality and quantity of factors of production OR by improving efficiency of markets

Question 3

Examples of supply side policies in UK?

Answer 3

• Privatisation of Royal Mail - Cut in corporation tax to 17% by 2020 - Infrastructure such as HS2 and Crossrail

Question 4

Examples of Free-market SSP’s

Answer 4

• Lowering corporation tax to stimulate investment - Lowering income tax to improve incentive to work - Privatisation - to improve efficiency due to profit motive - Deregulation - to improve competition

Question 5

Examples of interventionist (state driven) SSP’s

Answer 5

• State investment in public services and infrastructure - National minimum wage - Protectionist policies to allow domestic industries expand - Nationalisation

Question 6

What are the two acryonyms for SSP’s?

Answer 6

LIFE (Labour markets, Industry, Free market/state efficiency)

These all affect

EPIC (Efficiency, Productitvity, Incentives, Competition)

Question 7

L (labour markets)

Answer 7

• Improving education and training - increases PRODUCTIVITY - quality of labour increases - LRAS shifts right
• Reduction in income tax - increases INCENTIVE to work - increases quantity of labour
• Abolishing minimum wage/reducing trade union power - reduces cost of production - firms become more EFFICIENT - LRAS shifts right - increased capacity
• Reduce unemployment benefits - increased INCENTIVE to work - quantity of labour

Question 8

I (industry)

Answer 8

• Reduce corporation tax - reduces cost of production - more retained profit for investment - firms invest in capital - increases quality and quantity of capital (e.g. faster trains) - INCENTIVE to invest
• Subsidies to promote R&D - INCENTIVE to innovate - cost of production falls - innovation will improve quality & quantity of capital - LRAS and productive capacity increases

Question 9

FE (Free market v state efficiency)

Answer 9

• Privatisation - profit motive - greater competition - greater EFFICIENCY - more firms will enter market - lower cost, higher profits - re-invest profits
• Deregulation - reduces BTE so more firms enter markets - greater competition - greater efficiency - improves producitve capacity

Question 10

LRAS diagram effects?

Answer 10

LRAS shifts right

• Actual output and capacity increase
• Decrease in price level (makes exports more competitive so current account may improve)
• Increased employment - increased output may require more labour

Question 11

Evaluation of SSP’s

Answer 11

1. SSP’s can have long time lags - but it depends on type of policy. Education reform may take time to improve quality of workforce BUT cheaper childcare will be quicker to introduce
2. Some SSP’s (e.g. cutting income tax) leads to greater wealth & income inequality - depends on level of cut though
3. Sustainability issues - economic growth could lead to externalities such as pollution and congestion

Question 12

Pros and cons

Answer 12

Pros:

• Achieves 4 main macro objectives
• Stimulates AD and AS (e.g. cutting income tax may increase consumption as well as quantity of labour)
• Non-inflationary

Cons:

• Very expensive (HS2 costs approx £55bn) - opp cost & is it borrowed?
• No guarantee they will work - a cut in corporation tax may not lead to more investment if firms return profits to shareholders