2.6.3 - Supply-side policies

Question 1

What is a supply side policy?

Answer 1

Policies that seek to improve the long run productive potential of the economy

Question 2

What graph can you use to show the effects of a supply-side policy?

Answer 2

LRAS graph

PPF Curve

Question 3

What is a market-based supply-side policy?

Answer 3

This allows the free market to operate with the government reducing its (the government’s) role in the market

Question 4

What is a interventionist supply-side policy?

Answer 4

This involves government intervention to tackle market failure

Question 5

Name 2 examples of supply-side policies that will increase incentive

Answer 5

• Cutting income tax
• Cutting corporation tax
• Modification of welfare payments
• investment grants
• Regional policy

Question 6

What is regional policy?

*increase incentives

Answer 6

This is an incentive for firms to set up in depressed regions.

Question 7

What is the modification of welfare payments?

*increase incentives

Answer 7

Thus us widening the gap between benefits and wages to boost work incentives

Question 8

Name 2 supply-side policies that promote competition

Answer 8

• Deregulation

- Privatization

Question 9

What is deregulation?

Answer 9

Opening markets (so that there isn’t one supplier for gas etc) to freer competition and removing barriers to entry should help to provide productivity gains and boost supply

Question 10

What is privitization?

Answer 10

This is the minimization of the state (government) control.

this has been pursued by a number of (mainly conservatives) governments to privatize key areas of the economy in order to drive efficiency

Question 11

What is privitization?

Answer 11

This is the minimization of the state (government) control.

this has been pursued by a number of (mainly conservatives) governments to privatize key areas of the economy in order to drive efficiency

Question 12

Name one supply-side policy that can reform the labor market?

Answer 12

• Reformation of the trade unions

Question 13

What is the reformation of the trade union?

Answer 13

This is a reduction of the trade union power and influence.

This may give rise to lower wage rises, feeding through to less inflation (remember wage-price inflation) and more labor market flexibility.

Question 14

What is the reformation of the trade union?

Answer 14

This is a reduction of the trade union power and influence.

This may give rise to lower wage rises, feeding through to less inflation (remember wage-price inflation) and more labor market flexibility.

Question 15

What are the key macroeconomic objectives of the government?

Answer 15

• Inflation under 2%
• GDP growth
• Uneployment decrease + Employment decrease
• Higher living standards
• Stable balance of payments on the current account
• An equitable distribution of income and wealth

Question 16

Name 2 key objectives of supply-side policies

Answer 16

• Improve incentives to look for work and invest in people’s skills
• Increase labour and capital productivity
• Improve occupational and geographical labour to help reduce unemployment
• Increase investment and research and development spending
• Promote more compeitition and stimulate a faster pace of invention and innovation to miporve comptetitiveness
• Provide a platofrm for sustained no-inflationary growth
• Encourage the start-up and expansion of new businesses/enterprises especially those with export potential
• Improve the trend rate of growth of real GDP to help support improved living standards and regional economic balance
• Improve a country’s competitiveness and trade performance
• Meet challenges of climate change/increase reslience to external shocks

Question 17

What’s the definition of unemployment?

Answer 17

The number of people looking for work but who cannot find a job in a point of time.

Question 18

What’s the definition of inflation?

Answer 18

The rate of change in average price level over time.

Question 19

Draw or describe an AD curve

Answer 19

• Y axis labelled “Price Level”
• X axis labelled “Real National Output”#
• AD curve going down from Y axis
• Equilibrium point on AD curve where “P” and “Y” meet each other
• “P” where the current price is
• “Y” where the current output is

Question 20

Name 2 examples of market-based supply-side policies

Answer 20

• Cutting government spending (including welfare) and borrowing
• Lower business taxes to stimlulate capital investment spending
• Lower income tax rates to improve work incentives
• Improving the flexibility of the labour market including reforming employment laws and ecouraging more part-time work
• Competition policies, i.e deregulation and tought anti-cartel laws
• Privatization of state assets - i.e transferred to private sector
• Opening up an economy to overseas trade and investment
• Opening up an economy to inward skilled labour migration.

Question 21

Name 2 examples of interventionist supply-side policies

Answer 21

• State investment in public services and critical infrastructure
• A commitment to a minimum wage and/or living wage to improve work incentives and productivity in the labour market
• Progressive taxes on the wealthy to fund public and merit goods
• An active regional policy to inject extra demand into under-performing areas and regions of persistently high unemployment and low per capita income.
• Selective import controls to allow domestic industries to exapnd
• Management of the exchange rate to improve competitiveness
• Nationalisation of tougher regulation of key industries