Macroeconomics: Supply-Side

Question 1

Define interventionist supply-side policy.

Answer 1

Policies aiming to directly influence AS by government intervention to stimulate potential growth in the long run

Question 2

Define market-based supply-side policy.

Answer 2

Policies aiming to directly influence AS by lessening government intervention and operating through price incentives to stimulate potential growth in the long run

Question 3

Examples of interventionist supply-side policies

Answer 3

1. Education - HK Continuing Education Fund provides reimbursement of up to $25,000 HKD for specific courses
2. Retraining - Singapore Enterprise Training Support Program subsidizes firms with up to S$200,000 to send workers to skills-upgrading courses instead of laying off labor
3. R&D - HKITF supports around 8000 research projects with a funding commitment of $8 billion on the Research Program; Tax deductions of up to 300% for specific research institutions
4. Infrastructure - HKZMB

Question 4

Evaluate interventionist supply-side policy.

Answer 4

Pros (e.g. infrastructure)

• Improved transportation - traveling time reduced from 4 hours to 30 minutes
• Boost tourism - 2019 study shows the HKZMB introduced 15.3% more visitors into Macau, including high-spending tourists who spend 117% more on shopping and 40% more on entertainment than seaport visitors
• Increased jobs - construction of the HKZMB opened up 14000 jobs including the creation of professional technical staff and laborers

Cons

• Time lag - took nine years for construction, began in 2009 and only opened to the public in 2018
• Budget deficit/Opp cost - took over 127 billion RMB to build, 51.5 billion of which were funded by bank loans shared across the three regions
• Negative production externalities (pollution) - consequences on the abiotic environment of the HK and Pearl River regions including air, noise, and water pollution -> the number of Chinese white dolphins in HK waters dropped from 148 to 47 during construction years

Question 5

Examples of market-based supply-side policies.

Answer 5

1. Increase competition - Thatcher introduced foreign banks into the UK (e.g. Japanese and European banks) to attract FDI
2. Privatization - Thatcher sold off state-owned companies like British Steel/Rail/Airways/Gas
3. Labor market reforms - Thatcher toughened the eligibility of unemployment benefits and slashed the value; reduced trade union power by restricting the right to picket and made ballots for strike action mandatory with the failure of a fine and seizure of assets
4. Incentive-related policies - Thatcher cut the income tax for the top rate from 83% to 60% and cut the basic tax rate from 33% to 30%

Question 6

Evaluate market-based supply-side policies.

Answer 6

Pros

• Improved productivity - the number of passengers per employee of British Rail increased 37%, passenger trips doubled from 740 million to 1.5 billion
• Improved service quality - number of consumers with risk of low water pressure decreased 99%, wasteful leaks fell by 1/3
• Decreased prices - fell by 50% for telecommunications, 50% for industrial gas, 25% for residential gas
• Individuals gained from investments - number of UK citizens owning equities increased from 7% to 25%

Cons

• Increased unemployment - British Steel chopped its workforce by 31.5% from 1974 to 1984
• Decreased service quality - chopping up of British Rail into different segments caused inefficiencies in production -> insufficient track maintenance, led to high-profile rail accidents
• Widened income inequality - 22.2% of the population lived below 60% of median incomes