Supply-Side Policy Flashcards
What are supply-side policies? Why are supply-side policies implemented?
Increasing both the quantity and quality of the factors of production available in the economy
What is the difference between supply-side policies and demand-side policies?
Demand-side policies are aimed at the short-term, while supply-side policies are relevant for the long-run growth of the economy
Which incentives are given by supply-side policies to people and businesses?
They give incentive to people to work and build human capital,
Incentive to businesses to expand, invest and innovate.
What are ‘Reagonomics’?
Often supply-side policies are called ‘Reagonomics’ because they advocate tax cuts and deregulation to drive economic
growth
Why is economic growth so important? Especially for developing countries?
It is crucial for the creation of welfare.
Most powerful instrument for reducing poverty and improving the general quality of life in developing countries
What does potential GDP estimate?
Potential GDP estimates the highest level of output an economy can sustain.
Which assumptions are made when using potential GDP?
Assuming a country has achieved full employment & aggregate demand does not exceed aggregate supply
How do we interpret the current GDP comparing to the potential GDP?
When GDP falls short of that natural limit, it means the country is failing to live up to its economic potential.
When GDP exceeds that natural limit,
inflation is likely to follow.
What are the economic advantages of supply-side policies on the longer-term?
If successful, supply-side policies will shift the long-run aggregate supply curve (LRAS) to the right and enable a faster rate of economic growth in the longer-term.
How do supply-side policies prevent or limit the existence of
economic imbalances?
1) Reduce inflationary pressures by lowering costs
2) Create jobs
3) Improve the current
4) Sustainable public finances
account
What are “Free market based supply-side policies”?
Policy initiatives to:
- increase competitiveness
- free-market efficiency
- allocate resources
- improve markets
- give the private sector more freedom
What are “Interventionist supply-side policies”?
Goverment invention to:
- overcome market failures
- address
inequality issues
Government provides capital goods and public services where the market ‘fails’
Give some examples of “Free-marked oriented supply-side policies”
- Privatisation
- Deregulating markets
- Stimulate innovation
and entrepreneurship - Removing institutional and legislative obstacles
- Reducing (marginal) tax rates
- Improving international competitiveness
- Increasing labour market flexibility and mobility
- Trade liberalisation
Give some examples of “Interventionist supply-side policies”
- Public sector investments
- Improving education, skills and training
- Promoting a healthy work-force
- Direct support for businesses
- Incentives to use new technology
- Active regional policy
What is the “Neoclassical growth theory”?
The Neoclassical growth theory outlines how a steady economic growth rate results from a combination of three driving forces: labour, capital, and technology
What does the Neoclassical growth theory posit regarding accumulation of capital and technological innovation?
Accumulation of capital is important for economic growth
Relation between the capital and labour of an economy determines its output
Technology is
thought to augment labour productivity and increase the output capabilities of labour.
Economic growth cannot continue without technological
advances
Contribution from technology to growth is boundless.
What does “Total Factor Productivity” reflect?
TFP reflects the overall efficiency with which the labour and
capital inputs are used together in the production process.
How is growth in TFP measured?
Growth in TFP is measured as a residual ( Solow residual),
The portion of an
economy’s output growth that cannot be attributed to the accumulation of labour and capital
Why did productivity growth decline in advanced economies? (5)
Diminishing returns from technological progress.
A delay between the development of new (digital)
technologies and their incorporation in production
processes.
Slower technology creation in manufacturing firms, only partly compensated for by an acceleration of
innovation in services
Some structural drivers of productivity growth have lost momentum
Too low investment due to rising risk aversion
What drives succesful innovation?
• Imagination
Schumpeter’s creative destruction:
Incentives
Opening of markets, creating access to capital and opportunity
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