Week 1 - Supply side policies and some theme 1

Question 1

Define supply side policies

Answer 1

Supply-side policies are mainly microeconomic policies
aimed at making markets and industries operate more
efficiently and contribute to a faster underlying rate of
growth.

Question 2

What are supply side improvements?

Answer 2

Supply-side improvements: changes to the economy
that cause an increase in LRAS that is not a result of
government policy, but rather due to market-led
innovations

Question 3

Define incentives

Answer 3

Incentives: The motivation required for an economic
agent to behave in a certain way,

Question 4

Define competition

Answer 4

Competition is rivalry among sellers where each seller
tries to increase sales, profits and market share by
varying the marketing mix of price, product, distribution
and promotion

Question 5

Define labour market

Answer 5

Labour market: is a factor market it provides a means by
which employers find the labour they need, whilst
millions of individuals offer their labour services in
different job.

Question 6

Define product market

Answer 6

Product market refers to markets in which all kinds
of goods and services are made and traded, for example
the market for airline travel; smart-phones, new cars;
pharmaceutical products and the markets for financial
services such as banking, mortgages and pensions

Question 7

Define deregulation

Answer 7

Deregulation: Opening up of markets by reducing
barriers to entry. The aim is to increase supply,
competition and innovation and bring lower prices for
consumers

Question 8

Define privatisation

Answer 8

Privatisation: means the transfer of assets from the
public (government) sector to the private sector

Question 9

Define infrastructure

Answer 9

Infrastructure: the basic systems and services, such as
transport and power supplies, that a country or uses in
order to work effectively

Question 10

Is a cut in corporation tax a market based or interventionist supply side policy?

Answer 10

Market based

Question 11

Are subsidies market based or interventionist supply side policy?

Answer 11

Interventionist

Question 12

Give two advantages of market based supply side policies

Answer 12

1. No cost to the Government
2. Market should allocate resources most efficiently

Question 13

Give two disadvantages of market based supply side policy

Answer 13

1. Sustainability issues. There is a risk of environmental
   exploitation (negative externalities)
2. Might lead to greater inequalities in income and
   wealth.

Question 14

Give two advantages of interventionist supply side policy

Answer 14

1. Government can allocate resources to where it wants
   (rather like a command economy). Does not rely on
   market forces and, therefore, will avoid market failures.
2. Government can regulate, so that there are no
   undesirable environmental or inequality issues.

Question 15

Give 2 disadvantages of interventionist supply side policy

Answer 15

1. Risk of Government failure
2. Can often be expensive. This may cause the
   Government to run a budget deficit and create a large
   national debt.

Question 16

Draw an AD/AS diagram to show the impact of supply side policies, such as improvement in education and training, in the economy on real GDP, unemployment, and the price level

Answer 16

LRAS shifts right…falling price level, increasing real GDP.
The impact on unemployment depends on the initial
equilibrium position of the economy – whilst there is
more employment, the increase in LRAS may actually
widen the negative output gap if AD does not also rise

Question 17

Give 3 ways in which the government can use fiscal policy measures (tax or government spending) to improve the supply side of the economy

Answer 17

Fiscal measures on the supply side:
1. Decrease corporation tax rate
2. Increase spending on education and training
programmes
3. Increase spending on infrastructure in order to
encourage FDI
4. Reduce welfare benefits
5. Decrease income tax

Question 18

Give 2 ways in which the government could incentivise businesses to be more innovative and carry out more Research and Development

Answer 18

Incentivise innovation:
1. Awarding tax credits to firms that carry out innovative
research.
2. Privatisation and deregulation – essentially forcing
firms to be more dynamically efficient due to an increase
in competition in markets
3. Providing opportunities to apply for Government
grants for R&D
4. Encouraging Joint Ventures between countries

Question 19

Give two education policies the government could implement to improve the supply side of the economy

Answer 19

1. Scrap tuition fees at University
2. Apprenticeship schemes for school leavers
3. Retraining schemes for long-term unemployed

Question 20

Give 1 way the government could encourage higher productivity in the UK economy

Answer 20

1. More money to deal with mental illness. High job
   demands with little control over how to manage
   workload can lead to depression and anxiety

Question 21

How will cutting income tax increase the economy’s productive potential i.e. an increase in LRAS

Answer 21

A cut in income tax is an incentive to work. Since the
opportunity cost of not-working is now much larger,
more people will now be incentivized to work.

Question 22

How will cutting corporation tax the economy’s productive potential i.e. an increase in LRAS

Answer 22

A cut in corporation tax means that firms have more
NET profit at the end of the year. It is hoped that the
firm may, therefore, be more willing and able to invest –
since they have more funds to do so

Question 23

How could more government spending on apprenticeships for school leavers cause an increase in the economy’s productive potential i.e. an increase in LRAS

Answer 23

Apprenticeships allow young people to learn a skill whilst
on the job. Young people often struggle to find work
because they lack skills and experience. However,
apprenticeship programmes solve both problems. In the
long-run, if more school leavers take up an
apprenticeships this should lead to a higher skill level of
the labour force and, ultimately, a decrease in structural
unemployment.

Question 24

What will be the impact of decreasing corporation tax be on the 5 macro objectives - economic growth, inflation, unemployment, current account and budget balance.

Answer 24

Growth - up
Inflation - down
Unemployment - down
Current - improve (in long run)
Budget - worsen

Question 25

What will be the impact of increasing spending on transport infrastructure be on the 5 macro objectives - economic growth, inflation, unemployment, current account and budget balance.

Answer 25

Growth - up
Inflation - up in short run but down in long run
Unemployment - down
Current - Improve in LR
Budget - worsen

Question 26

Why is economics a social science?

Answer 26

Because it studies society and relationships between people

Question 27

What are assumptions in economics?

Answer 27

Assumptions are initial conditions that are made before a micro or macroeconomic analysis is built.

Question 28

Why are assumptions used in economics?

Answer 28

To simplify

Question 29

Why are assumptions in economics often criticised?

Answer 29

For being unrealistic

Question 30

What does ceteris paribus mean?

Answer 30

All other factors held constant or equal