Unit 4, Area of Study 2 - Aggregate Supply Policy

Question 1

Capacity constraints

Answer 1

Factors that prevent (or constrain) an economy from producing more goods and services such as, skill shortages and infrastructure bottlenecks.

Question 2

Production

Answer 2

the process of converting resources and inputs into goods and services or the total volume (or value) of goods and services produced over time.

Question 3

Productivity

Answer 3

the volume of output (e.g. real GDP) that is produced from a given number of inputs (e.g. labour and capital resources).

Question 4

Productive capacity

Answer 4

the point at which production (or GDP) is occurring at the maximum level possible in an economy.

Question 5

Aggregate Supply

Answer 5

represents the total volume of goods and services that all suppliers have produced and supplied over a period of time.

It is important to note that, “the willingness and ability of suppliers to supply” influences aggregate supply, however, it is not a definition of aggregate supply.

Question 6

Infrastructure

Answer 6

Infrastructure refers to the key physical or organisational structures within an economy that provide the ‘building blocks’ around which economic activity can take place.

Question 7

Spending on infrastructure will help achieve SSEG by …

Answer 7

• Boosting productivity
• Boosting efficiency
• Boosting long term productivity capacity
• Removal of capacity constraints / bottlenecks
• All increase AS = increase in output (GDP) = strong growth.
• ↑ productivity, ↑ efficiency and ↓ cost of production = reduce cost inflationary pressures = long term sustainable growth
• Achieving low cost inflation = increase in international competitiveness = increase in AD and more sustainable growth in real GDP.

Question 8

Spending on infrastructure will help achieve Low inflation by …

Answer 8

• Improved efficiency = lower per unit production costs = lowing cost inflationary pressures.
• Reduced costs due to fuel, maintenance and time with infrastructure on roads, rail and other types of transport infrastructure.
• Removal of capacity constraints / infrastructure bottlenecks reduces production costs.
• Improved transport = mobility of workers = high participation rate (lower wages) and availability of required skills.
• Controls cost inflationary pressures in the economy.

Question 9

Spending on infrastructure will help achieve full employment by …

Answer 9

• ↑ levels of output (GDP) means businesses are likely to require more workers = ↓ in unemployment
• Keeping production costs lower = ↑ in international competitiveness = business expanding into new markets and employing more staff = ↓ in unemployment

Question 10

Spending on infrastructure will help improve living standards by …

Answer 10

• Investment in infrastructure assists in maximising or boosting material living standards by:
  
  • Improved purchasing power via downward pressure on inflation•Boost to real incomes via employment growth
• Investment in infrastructure assists in maximising or boosting non-material living standards by:
  
  • Lower unemployment = improved happiness and feelings of self worth, lower crime rates and better health outcomes.
  • Investment in infrastructure can reduce market failure and the underproduction of public goods.

Question 11

Strengths of spending on infrastructure as an AS policies in achieving the goals.

Answer 11

Can positive long term impact on the productive capacity of the economy, reducing inflationary pressures / protecting environment / reducing market failure.

Question 12

Weaknesses of spending on infrastructure as an AS policies in achieving the goals.

Answer 12

• Used as a political tool in the election cycle.
• Financial constraints of the budget limiting Federal governments ability to fund infrastructure projects / high public (govt) debt levels.
• Impact lag - it often takes years before the investment in the infrastructure has an impact on the productive capacity of the economy.

Question 13

Aims of Aggregate Supply policies

Answer 13

• Push AS curve to the right
• Boost Australia’s productive capacity
• Enable higher output (GDP) at lower prices and higher employment levels
• Lower inflation
• Increasing real GDP, without adding to inflationary pressure in an effort to boost living standards (sustainable growth).
• Lower production costs enable firms to reduce prices for any given level of output – without sacrificing profits!
• Alternatively, a bigger productive capacity facilitates greater national output before capacity constraints (and inflation become a problem).

Question 14

Impact of dynamic efficiency on AS

Answer 14

Positive impact on productive capacity of the economy and aggregate supply by ensuring resources are quickly reallocate through creative and innovative means ensuring an economy can maximise its volume of production of goods and services over any given period of time.

Question 15

Impact of inter-temporal efficiency on AS

Answer 15

The drive to achieve inter-temporal efficiency can often result in a short term drag on Aggregate Supply, however in the long term it helps boost the productive capacity of the economy, and increases aggregate supply (volume of production of goods and services over a given period of time through efficiency gains and prevention of the negative impacts of climate change impacting producers ability to produce (e.g., the occurrence of extreme weather events that lead to damage and destruction of key infrastructure such as road, rail and ports).

Question 16

Impact of inter-temporal efficiency on AS

Answer 16

By maximising output and maximising living standards, allocative efficiency is achieved.

And in the process Aggregate supply is maximised both in the short, medium and long term when allocative efficiency is achieved, via the productive capacity of an economy and volume of production of goods and services over any given period of time.

Question 17

Impact of productive efficiency on AS

Answer 17

Maximising outputs from any inputs, this ensures the maximum volume of production of goods and services over a given period of time in an economy

Question 18

Relationship between AS policies and achievement of SSEG

Answer 18

Australia’s rate of economic growth is limited to the speed at which our productive capacity can expand.

By boosting productive capacity, AS policies will increase speed limit enabling a higher rate of economic growth coupled with lower inflation.

Results from downward pressure on prices = expansion in AD (via greater C, I and X-M) which = increase in real GDP (economic growth).

Lower prices = sustainable growth as no inflationary pressures.

Environmental policies ensuring that environmental pressures do not build up in the economy assisting sustainability.

Question 19

Relationship between AS policies and achievement of Low Inflation

Answer 19

By boosting productivity and reducing costs of production = lower cost inflationary pressures, this has come in the form of market deregulation, infrastructure investment, labour market reforms, and immigration).

Increasing productivity capacity (and Aggregate Supply), shifting the AS curve to the right, reducing cost inflationary pressures.

Question 20

Relationship between AS policies and Full Employment

Answer 20

Increased volume of production = increase need for additional workers to increase production = reduction in levels of unemployment

Question 21

Relationship of AS policies and International competitiveness

Answer 21

Aggregate supply policies seek to increase efficiency, reduce production costs and keep a lid on inflation.

All factors that will ensure Australia’s international competitiveness

Question 22

Relationship between AS policies and living standards

Answer 22

• Material living standards can improve :
  
  • there will be a greater volume (and/or quality) of goods and services available at lower prices.
  • Decrease in unemployment = higher disposable income
• Non-material living standards can improve
  
  • via a greater efficiency in production helping to reduce strains on resources.
  • Improved working conditions (as technology can take over mundane tasks previous performed by labour).

Question 23

Subsidy

Answer 23

a payment or concession fo a producer or consumer that is designed to increase consumption/production of a good or service by covering some of the costs involved.

Question 24

Subsidies and the aims

Answer 24

In general: all aimed at boosting productive capacity in the long term and providing a net benefit to Australia, not just individual companies or industries.

Question 25

Current budgetary policy relating to subsidies to use as a contemporary example.

Answer 25

Child care subsidy: means tested financial support that is designed to reduce the cost of childcare which in turn increases the production rate and the labour supply = ↑ Labour Force Participation Rate = ↓ costs of production (Wages) and ↑ labour productivity growth.

Question 26

What is a research and development grant?

Answer 26

Provided for qualifying businesses by way of application in advance of a project and offer a lump sum to put towards the investment.

Question 27

Current budgetary policy relating to Research and Development Grants to use as a contemporary example.

Answer 27

• Research and development tax incentive (150%) – The tax incentive reduces company R&D costs by offering tax offsets for eligible R&D expenditure – incentivizes business to engage in R & D where they might not have due to cost and risk.
• The Government’s $5 billion Ten Year Investment Plan for the Medical Research Future Fund, which includes investment in projects to improve patient care, increase access to clinical trials and improve health outcomes for Australians = health workforce = = ↑ Labour Force Participation Rate = ↓ costs of production (Wages) and ↑ labour productivity growth.

Question 28

Strengths of using subsidies as AS policy to achieve goals.

Answer 28

• Subsidies can target particular areas or industries that require additional support at specific times.
• Because of the ability to target specific industries, subsidies can also be used to assist beneficial industries in their early years of development, for example, such as subsidies for medical research technologies or tech start-ups or export development grants that reduce costs of production.
• In the short-term, subsidies will reduce the cost of production for companies, encouraging them to continue producing even when they should close. This was used for the Car Manufacturing industry.

Question 29

Weaknesses of using subsidies as AS policy to achieve goals.

Answer 29

• Opportunity cost of providing a subsidy to one group or industry / budgetary outlay could be used on infrastructure for example.
• Can lead to reduced efficiency, as groups or industries receiving subsidy is not incentivised productivity due to protection from market forces / competition
• Can lead to government failure and unintended outcomes.

Question 30

Strengths of using Research and Development grants as AS policy to achieve goals.

Answer 30

• Spending on research and development (R&D) creates economy-wide spillovers (positive externalities), which means that without government support there would be underinvestment in R&D by private industry.
• R&D grants can target particular industries or sectors that the government (or experts) consider provide a particular economic or social benefit to the country.

Question 31

Weaknesses of using Research and Development grants as AS policy to achieve goals.

Answer 31

• Subsidising individual businesses’ R&D spending requires either a reduction in tax collections (through tax concessions) or increased government spending (through grants). This can lead to pressure on the federal Budget.
• Still not guaranteed outcome that the R & D will be successful

Question 32

Spending on Training and Education

(Contemporary Example - The JobTrainer Fund)

Answer 32

The JobTrainer Fund

2020-21 Federal Budget established a $1 billion JobTrainer fund to support around 300,000 enrolments in free or low fee training places for job seekers and young people (including school leavers) to upskill or reskill in areas of identified skills need.

2021-22 Budget, the Australian Government announced it would commit an additional $500 million to extend the program until 31 December 2022

2022-23 budget

The JobTrainer Fund has been further extended as part of the 2022-23 Budget, with the Australian Government announcing an additional investment of $48.5 million over two years.

Question 33

Spending on Training and Education

(Contemporary Example - Australian Apprenticeships Incentive System )

Answer 33

$954 million over 5 years from 2021 – 22 to introduce a new Australian Apprenticeships Incentive System from 1 July 2022 to 30 June 2024, providing support to employers and apprentices in priority occupations – refer to handout for priority occupations.

Question 34

How does spending on training and education impact on AS?

Answer 34

• Assists in alleviating the capacity constraint of skill shortages
• Boosts quality and quantity of factors of production (i.e., skilled human capital / labour resources).
• Boosts productivity and can assist in lower costs through higher LFPR
• Improves productive and dynamic efficiency.
• Assists in reducing the instance of structural unemployment and long-term unemployment.

Question 35

Examples of Tax Reform

Answer 35

Households / Consumers

Personal Income Tax plan reducing the tax rates within the progressive tax system to leave consumers with higher level of disposable income.

Businesses / Producers

Reducing the corporate tax rate from the current 30% is a possible change. At the moment only businesses with turnover of $50 million or less access a rate of 25%

Question 36

Impact of Personal Income Tax reform on Aggregate Supply

Answer 36

• Lower personal income tax provides an incentive to work (quantity of factors of production) and in industries with bonuses attached to performance, lower taxes will see increased effort (productivity growth) and more people willing to improve their skills via training and education courses in order to advance their careers (quality of factors of production) = increase in aggregate supply.
• Lower personal income tax rates = higher labour force participation rate (quantity of factors of production) and increase in productivity and downward pressure on wage growth due to increased competition in the labour market = increase in aggregate supply.
• Lower personal income tax rates = downward pressure on labour costs due to increase labour force participation rate = easing of labour shortages = lower costs of production = increase in aggregate supply.

Question 37

Impact of Corporate Tax reform on Aggregate Supply

Answer 37

Lower company tax rates (i.e., 25%) = greater retained profits to reinvest into the business in the form of new plant, equipment and technology (quality of factors of production, productivity growth = increase in aggregate supply.

Question 38

Strengths of tax reform

Answer 38

• Can target whole economy with incentive to boost AS via productivity growth and quantity of factors of production.
• Assist with solving structural problems within the economy that AD policies cannot fix – main focus being efficiency / productivity within an economy.
• Compliments AD policies as any reduction in income tax will boost private consumption and private investment expenditure.

Question 39

Weaknesses of Tax Reform

Answer 39

• Weak evidence on that personal tax cuts result in a boost in efficiency and increase in productive capacity. Some economists argue even higher tax rates provide an incentive for people to work even harder.
• Tax cuts can have a negative impact on Budget outcome, driving it deeper into deficit if there is no boost to productivity and growth

Question 40

What is Welfare Reform?

Answer 40

Welfare reform as a government policy entails changing the system of cash payments or direct benefits in an effort to help boost economic efficiency, productive capacity and aggregate supply.

Question 41

Examples of welfare reform and the impact on aggregate supply

Answer 41

• Increase to qualifying age for pension from 65 to 67 (by 2023) = aimed at impact of ageing population on the labour force participation rates (cost of production and quality and quantity of factors of production) = protection of aggregate supply by removal of capacity constraints such as labour and skills shortages.
• Continued government investment in child care to help ease cost of living pressures for around one million Australian families = increase in labour force participation rate (costs of production, productivity growth and quality and quantity of factors of production) = increase in aggregate supply.
• Funding the National Disability Insurance Scheme allows for those with special needs to re-enter the workforce boosting quantity and quality of factors of production = increase in aggregate supply.
• Incentives put in place for those on Jobseeker to be more aggressive in the pursuit of employment = more unemployed obtaining jobs (quantity of factors of production) = increase in aggregate supply.

Question 42

Strengths of Welfare Reform

Answer 42

• Focused on encouragement of participation in the labour force has flow on effect to costs of production and productivity growth, and can assist with alleviating the capacity constraint of skills shortage.
• Provides a safety net for those in genuine need.

Question 43

Weaknesses of Welfare Reform

Answer 43

• Taking stick to unemployed to force them in work assumes they’re voluntarily unemployed.
• Increasing pension age assumes older people are physically and mentally capable of working.
• Higher participation rates lift our productive capacity, this growth in AS will not be utilised unless corresponding rise in AD.
• More parents working not necessarily good for children’s well being.

Question 44

Immigration policy

(Skilled Migration Programme)

Answer 44

A strategic supply-side approach to managing the number (level) of migrants coming to Australia from overseas attracting young, English speaking and suitably skilled people.

Question 45

Why do we need Skilled Migration?

Answer 45

The effects of an ageing population (and declining fertility rates) has created a skills shortge in the Australian economy, creating a significant capacity constraint holding back economic growth by negatively impacting the productive capacity of the economy and aggregate supply

Question 46

How does the Skilled Migration Programme impact on the Labour Market?

Answer 46

• Alleviates the capacity constraint of skill shortages by increasing quantity and quality of factors of production (i.e., Labour Resources)
• Boosts the Labour Force Participation Rate, placing downward pressure on wages (the price of labour in the labour market and a key cost of production) and improves productivity growth.
• Both these impacts have a positive impact on the supply and price of labour in the labour market.

Question 47

How does a Skilled Migration Programme impact on Aggregate Supply?

Answer 47

Immigration can help to boost the nation’s aggregate supply levels in a number of ways:

• Increase the supply of labour (quantity of factor of production), placing downward pressure on wages rates (production costs), boosting employment and output.
• Alleviate capacity constraints (or skills shortages) and help to maintain labour productivity level (quantity and quality of factors of production and productivity growth).
• Further enhance productivity via the intake of young skilled professionals to replace the ageing population and retirees (quantity and quality of factors of production).

Each of these impacts, positively impact on producers abiltiy to increase the volume of production of goods and services in the Australian economy over a given period of time (Aggregate Supply).

Question 48

How does the Skilled Migration Programme influence the achievement of the goal of strong and sustainable economic growth?

Answer 48

• Boosting the productive capacity (and AS) by improving productivity (productivity growth), increasing supply of labour and removing capacity constraint of skills shortages (both quality and quantity of factors of production) = economic growth as suppliers are more willing and able to supply in the economy at lower prices à expansion in demand (i.e. higher levels of output at lower prices = higher levels of economic activity due to expansion in demand = growth).

Question 49

How does the Skilled Migration Programme influence the achievement of the goal of full employment?

Answer 49

• Removal of capacity constraints (skill shortages) and increase in supply of labour eases upward pressure on wages and costs via increase in LFPR = helps producers maintain output at relatively low prices = expansion in demand = employment opportunities as producers require more labour to facilitate increase in output.

Question 50

How does the Skilled Migration Programme influence the achievement of the goal of low inflation?

Answer 50

• Whilst immigration can cause demand inflationary pressures, as the nature of Australia’s immigration policy focuses on skilled migration, the boost to productivity growth and downward pressure on wages (cost of production) = increase in labour supply and easing of skills shortage / capacity constraint = boost to productivity capacity (and AS), placing downward pressure cost inflationary pressures on inflation (i.e. lowering the cost per unit of production).

Question 51

Market based approach to aggregate supply policy

Answer 51

Market based approaches: rely on the relatively free operation of markets to achieve efficiency gains and boost aggregate supply.

E.g.,

• Trade liberalisation
• Immigration policy
• Tax reform
• Welfare reform

Question 52

Government interventionist approach to Aggregate Supply policy

Answer 52

Interventionist policies: involve the government becoming more actively involved in the operation of markets to ensure that the economy captures efficiency gains and would otherwise not have occurred.

E.g., Research and development grants, investment on infrastructure, spending on training and education.