Supply side policy chapter 24

Question 1

infrastructure

Answer 1

buildings and constructions that support society and economic activity like bridges, roads and sewage systems

Question 2

supply side policy

Answer 2

government policy tools designed to increase aggregate supply

Question 3

how do governments use supply side policy to increase aggregate supply

Answer 3

by improving the workings of product and factor markets. Sometimes supply-side policy tools will reduce government intervention; at other times they result in increased government intervention.

Question 4

what do supply side policy tools seek to do

Answer 4

it seeks to increase productive capacity and so shift the economy’s long-run aggregate supply (LRAS) curve to the right. The main way supply-side tools try to do this is by increasing productivity.

Question 5

tools of supply side policy tools

Answer 5

tools of supply-side policy include spending on education and training, promoting infrastructure development and support for technological improvement. Other tools include cuts in corporate tax, cuts in income tax, trade union reform, privatisation, deregulation and relaxation of immigration controls.

Question 6

how does spending on education and training increase productivity

Answer 6

it raise the quality of education and training. If this occurs, workers’ skills and productivity may increase as well as their flexibility and mobility. A more efficient labour force is one of the key causes of an increase in a country’s productive capacity. With the same sized labour force, more goods and services can be produced. A better educated and trained population can also increase the quality of entrepreneurship, which can increase innovation.

Question 7

how does promoting infrastructure development increase productivity

Answer 7

Good quality infrastructure, including efficient transport, power, energy and telecommunication networks, keeps the costs of firms low and enables them to get their products to market quickly. For instance, reducing power outages will mean that production is interrupted less frequently.

Question 8

how do governments finance and provide transport infrastructure

Answer 8

The government may finance and provide transport infrastructure itself or it may encourage the private sector to provide infrastructure such as a motorway which charges motorists a fee for using it.

Question 9

how can support for technological improvement increase productivity

Answer 9

Technological improvement can enable capital equipment to produce a greater output at a lower cost. A government can subsidies both universities and private sector firms to encourage the development and introduction of new technology. Government subsidies are used widely throughout the world to encourage firms to increase output.

Question 10

how can cut in corporate tax increase productivity

Answer 10

Cutting corporate tax may encourage investment, as firms will have more funds to invest and they will know that they will be able to keep more of any profit earned. More investment will increase both aggregate demand and aggregate supply.

Question 11

how can cuts in income tax increase productivity

Answer 11

Cutting income tax may encourage workers to increase their working hours and accept promotion and greater responsibility. It may also persuade some workers to stay in the labour force for longer and persuade others to enter the labour force.

Question 12

how can trade union reforms increase productivity

Answer 12

it can increase workers’ flexibility and mobility and cut down on the number of days lost through strikes. A resulting fall in industrial action may, in addition, make multinational companies more willing to invest in the country. It is possible that the measure may increase both productivity and production.

Question 13

how can privatization and deregulation increase productivity

Answer 13

many countries have adopted privatization programmes in the belief that firms operate more efficiently in the private sector. Some have also deregulated a number of markets by removing barriers to entry and laws and regulations that increase firms’ costs of production.

Question 14

how can encouragement of immigration increase productivity

Answer 14

If a government encourages immigration of skilled workers, it can increase both the quantity and quality of labour in the country.

Question 15

how does supply side policy tools increase a country’s national income and output

Answer 15

They can do this by increasing the quality and quantity of resources. Government spending on infrastructure will increase the quantity of resources that can be used in the production and transport of products. Technological improvement raises the quality and productivity of capital goods.

Question 16

how does supply side policy tools affect price level

Answer 16

over time, AD tends to increase. if increases in aggregate supply can keep pace with higher aggregate demand, a country can enjoy higher output (higher real GDP) without experiencing demand pull inflation. governments may also employ supply side policy measures to correct cost push inflation

Question 17

how can improved education and training affect employment

Answer 17

Improved education and training will increase workers’ skills and geographical and occupational mobility. This should reduce both frictional and structural unemployment.

Question 18

how can technological improvement reduce employment

Answer 18

it may result in some workers being replaced by capital equipment. However, it is possible that both technological improvement and infrastructure development may increase employment. This is because both lower costs of production, which may increase sales of goods and services at home and abroad. More workers may be taken on to produce the higher output.

Question 19

hoe can technological improvement and infrastructure development increase employment

Answer 19

it is possible that both technological improvement and infrastructure development may increase employment. This is because both lower costs of production, which may increase sales of goods and services at home and abroad. More workers may be taken on to produce the higher output.

Question 20

why is spending on education and training be very effective in the long run

Answer 20

this is because such spending may directly increase the quality of labour and productive capacity

Question 21

why is spending on education and training not be very effective in the short run

Answer 21

In the short run, it may also contribute to inflation. This is because increased government spending on education and training may increase aggregate demand before it increases aggregate supply.

Question 22

why is providing more education and training not be very effective

Answer 22

Providing more education and training may not be very effective if it is not of a high quality or it develops skills that will not be in demand in the longer term. In addition, increased spending on training may be successful in raising the skills of workers, but if their pay rises by more than their productivity, costs of production will still rise.

Question 23

problems with infrastructure development

Answer 23

Infrastructure development can be expensive and can take considerable time to construct. Transport infrastructure development may not always be well linked.Infrastructure development may also have harmful effects on the environment.

Question 24

effect of technological improvement

Answer 24

Technological improvement involves change. New products and new methods of production are created. New jobs appear while others are lost. Some people may have to change jobs and move to different areas, and not everyone will cope well with this.

Question 25

why may supply side policy tool which increase aggregate supply may not raise output if the economy is initially operating with spare capacity

Answer 25

This is because while it will increase productive potential, that potential will not be used if there is not enough aggregate demand. Firms may be capable of producing more, but they will not do so if they do not expect to sell any extra output.