Supply side policy

Question 1

What are the two types of demand-side policy?

Answer 1

The two types of demand-side policy are fiscal policy (government spending and tax) and monetary policy (interest rates and money supply).

Question 2

Which of the following shows the impact of a reduction in fuel costs?

Answer 2

A reduction in the cost of production increases SRAS. This leads to an increase in real GDP as shown and this is economic growth.

Question 3

Which type of policy is infrastructure spending an example of?

Answer 3

Infrastructure spending, such as spending on roads and railways, is an interventionist supply side policy as the government is getting actively involved in increasing aggregate supply.

Question 4

What is the likely impact of government funded infrastructure projects?

(example - HS2)

Answer 4

Improvement in infrastructure, such as HS2, will improve the geographical mobility of labour. This will increase the productivity of labour and shift the LRAS out.

Question 5

Which of the following can occur as a result of an increase in government spending on infrastructure?

Answer 5

Crowding out

Question 6

What is crowding out again?

Answer 6

Crowding out occurs when government spending pushes up demand for resources which increases their price. For example, they will spend money on workers to build infrastructure which will push up wages. Or they will borrow money which will push up the interest rate. This makes it more expensive for private sector firms to invest and so they have been crowded out.

Question 7

Explain one advantage of increased government spending on infrastructure as a supply side policy.

Answer 7

Infrastructure projects such as HS2 improve the geographical mobility of labour, increasing the productivity of labour and causing the LRAS to shift out. Another advantage is that it increases aggregate demand as increases in employment will increase consumption. Both the increase in LRAS and AD will lead to economic growth.

Question 8

Explain one disadvantage of increased government spending on infrastructure as a supply side policy.

Answer 8

However, a disadvantage is that government spending on infrastructure might crowd out private firms. By borrowing money to spend on new infrastructure, the government is increasing the demand for borrowed money, land, labour and capital. This increases prices for each factor of production, increasing costs for firms. This shifts the SRAS in and reduces real GDP.

Question 9

Interventionist Supply-Side Policies

Answer 9

Policies where the government is actively involved in increasing aggregate supply.

Question 10

Market-Based Supply-Side Policies

Answer 10

Policies where the government aims to increase aggregate supply by decreasing intervention in the economy and allowing the market to operate efficiently.

Question 11

What type of supply-side policy is reducing corporation tax an example of?

Answer 11

Reducing corporation tax is an example of a market-based supply side policy because it involves the government reducing their intervention and allowing the market forces to operate freely.

Question 12

3 advantages of reducing corporation tax.

Answer 12

Advantage 1 - A reduction in corporation tax will reduce the cost of production. This will encourage new firms and expansion of existing firms which will shift the SRAS to the right and leads to economic growth and a reduction in the price level.

Advantage 2 - Firms can keep more of their profit and so they are more likely to invest. This will increase the productivity of capital and shift LRAS to the right leading to economic growth and a reduction in the price level.

Advantage 3 - Firms can keep more of their profit and so they are more likely to invest. Investment is a component of AD and so an increase in investment will increase AD which will lead to economic growth.

Question 13

one disadvantage of reducing corporation tax.

Answer 13

Disadvantage 1 - A reduction in corporation tax may reduce tax revenue. There is an opportunity cost as there is now less money available to spend in other areas, such as healthcare or infrastructure.

Question 14

What type of supply side policy is reducing the national minimum wage?

Answer 14

A reduction in the national minimum wage is a market-based supply-side policy. The government is reducing their intervention and allowing market forces to operate freely.

Question 15

What type of unemployment is shown in a minimum wage on a labour market.

Answer 15

At the national minimum wage, more labour is being supplied than is being demanded - there is excess supply. This is also known as real wage unemployment - unemployment that occurs because the wage is above the equilibrium.

Question 16

How might emigration of Polish workers affect the UK economy?

Answer 16

Emigration will mean that the quantity of labour will decrease. This will shift the long-run aggregate supply curve to the left as the productive capacity of the economy has decreased.

Question 17

Explain advantages of reducing the national minimum wage.

Answer 17

Advantage 1 - a decrease in wage costs will decrease the cost of production for firms, which will increase short run aggregate supply.

Question 18

Explain disadvantages of reducing the national minimum wage.

Answer 18

Disadvantage 1 - a reduction in the minimum wage will reduce disposable income for many households. This will reduce consumption and decrease aggregate demand, which will lead to a reduction in real GDP.

Disadvantage 2 - a reduction in the minimum wage may mean that workers emigrate from the UK in search of higher wages. This will reduce LRAS and reduce economic growth.

Question 19

On Friday, December 22, 2017, US President Donald Trump signed the massive tax bill. Formerly known as the Tax Cuts and Jobs Act – so-named because it cuts individual, corporate and estate tax rates, and because the lower corporate tax rates are said to be a precursor to job creation. The previous rate of corporation tax in the US was 35%. Starting in 2018, the corporate tax will be set at a flat rate of 21%.
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What type of policy is this an example of?

Answer 19

Reducing corporation tax is an example of a market-based supply side policy because it involves the government reducing their intervention and allowing the market forces to operate freely.

Question 20

S President Donald Trump’s budget plan for 2019 involves using $200 billion in federal funds with the aim of stimulating $1.5 trillion in infrastructure improvements over 10 years. This could reshape how the federal government funds roads, bridges, highways and other infrastructure. The administration also said that it will eliminate time consuming bureaucratic roadblocks which can tie up projects for years.

Which of the following is a likely impact of this policy?

Answer 20

Investing in infrastructure such as “roads, bridges, highways” will decrease the geographical immobility of labour (or increase the mobility!). This will increase the productivity of labour as more labour becomes readily available to firms, leading to an increase in LRAS.

Question 21

What type of policy would deregulation be classed as?

Answer 21

Deregulation affects producers and so it would be classed as a supply-side policy. It is market-based because it involves removing regulations from the market.

Question 22

Which of the following shows the likely impact of investors pressuring newly privatised firms to profit maximise?

Answer 22

Privatised firms will be under pressure from investors to profit maximise. If firms begin to profit maximise then there is more incentive to become efficient and decrease costs. As costs decrease, firms are willing to supply more for the same price and so SRAS will increase and therefore shift to the right.

Question 23

Which of the following shows an impact of an increase in the number of students studying at university?

Answer 23

In the short run, more students means less people in the workforce. As shown below, this will decrease labour supply and push wages up. An increase in wages will increase production costs for firms which in turn will reduce SRAS.

Question 24

Explain one advantage of subsidising university education.

Answer 24

Advantage 1 - subsidies allow universities to offer their courses at a lower price, which will encourage more students to pursue higher education. Over time, this will make workers more productive and lead to an increase in labour supply. The LRAS shifts to the right and the economy grows.

Question 25

Explain one disadvantage of subsidising university education.

Answer 25

Disadvantage 1 - in the short run, education subsidies lead to a decrease in the supply of labour as more people spend their time studying instead of working. This leads to an increase in wages which increases the cost of production and reduces SRAS, leading to a reduction in economic growth in the short run.

Question 26

Which of the following shows a demand-side effect of decreasing income tax?

Answer 26

Decreasing income tax will lead to an increase in disposable incomes. This will then increase consumption, which will cause an increase in AD. This increase in AD will increase profits for companies, who will hire more people, who will spend even more money. This is the positive multiplier effect.

Question 27

Is reducing income tax a market-based or an interventionist policy?

Answer 27

Reducing income tax is a market-based supply-side policy because the government is taking a step back and intervening less.

Question 28

What impact does a decrease in hours spent working have on the the supply of labour?

Answer 28

If workers decide to work fewer hours, the labour supply will decrease.

Question 29

Explain the impact of a reduction in income tax on aggregate supply.

Answer 29

Reducing income tax means that workers get to keep more of their earnings and so disposable income increases. This is likely to increase the number of hours they choose to work and so there will be an increase in labour supply. This will decrease wages which will decrease the cost of production. This will shift the SRAS to the right, increasing real GDP.

However, an increase in disposable income could cause some workers to decrease their labour supply as they now need to work less to earn the same amount of money. This might lead to a decrease in labour supply. This will increase wages which will increase the cost of production. This will shift the SRAS to the left, limiting economic growth.

Question 30

Explain one advantage and one disadvantage of increasing spending on healthcare.

Answer 30

Advantage 1 - increasing spending on healthcare will increase the productivity of labour. This will shift the LRAS to the right, increasing economic growth.

Disadvantage 1 - spending on the NHS may be inefficient and of poor quality. If funding is increased, it is not given that all the extra funds will go towards increasing productivity and so the effects on LRAS will be limited.

Question 31

Which of the following shows a likely impact of an increase in government subsidies for higher education?

Answer 31

Without government intervention, university education is underconsumed. Consumers don’t take into account all the external benefits of university education (like making money for your future employer, paying more tax, helping people with your new skills). By subsidising university education, the government is reducing this market failure and encouraging consumption.

Question 32

Which of the following statements is true in regards to a reduction in benefits for low income households?

Answer 32

Poorer households have a higher marginal propensity to consume. This is because they have less money meaning that they are more likely to spend a higher % of any additional income. However, since their income is falling as a result of the cut to their benefits, there will be a significant downward multiplier effect as their consumption is reduced.

Question 33

Which of the following shows the likely impact of an increase in government spending on university education?

Answer 33

An increase in government spending on university education will encourage more students to pursue higher education. This will make workers more productive and increase labour supply which will shift the LRAS curve right and lead to economic growth. However, in the short run labour supply will decrease as more people are studying instead of working. This will increase wages which will increase the cost of production and reduce SRAS.

Question 34

What suggests economic growth does not conflict with environmental sustainability

Answer 34

1. Economic growth allows companies to invent solutions to the climate crisis
2. Growth leads to structural changes in the economy which reduce carbon emissions