Supply-Side Policy

Question 1

explain the types of supply-side policy: investment in education and training

Answer 1

• the gov invest heavily in training and education to improve the skills and qualifications of a workforce
• a better educated workforce will help increase the productivity capacity of the economy
• this leads to greater employment and higher living standards
• improving human capital can therefore be seen as a merit good that benefits society.

Question 2

explain the types of supply-side policy: lower direct taxes.

Answer 2

• direct taxes are those placed on an individual or firm
• common direct taxes are corporation and income tax
• reducing income tax provides an incentive for individuals to go back to work or work for longer hours
• reducing corporation tax allows firms to achieve higher profits: this provides the finance to invest in productive capacity.

Question 3

explain the types of supply-side policy: privatisation

Answer 3

• occurs when a public sector organisation joins the private sector

this may lead to:

• greater efficiency as profit maximisation leads to firms to cut average costs
• increased competition, rather than government monopoly
• the use of market forces to ensure that goods and services are produced to meet consumer needs: leads to greater choices and lower prices as firms compete

Question 4

explain the types of supply-side policy: deregulation

Answer 4

• opening up of markets to new competition through the removal of rules and regulations that create barriers to entry.

this leads to:

• reducing the size of the public sector allows for greater opportunities in the private sector
• however, many private firms rely on their dealings with the public sector, and may suffer its size reduced

Question 5

explain how supply-side policies can be used to achieve government objectives: increasing employment and economic growth

Answer 5

• improving the human capital of the workforce helps to create jobs
• firms will find it easier to increase production

Question 6

explain how supply side policies can be used to achieve government objectives: ensuring price stability

Answer 6

• increased productive capacity leads to an increase in supply
• this lowers costs of production
• the economy as a whole will benefit from lower costs
• this will reduce inflationary pressure
• this will lead to a continuous fall in the costs of production