Macro 15 - Evaluating Supply-Side Policy

Question 1

Potential problems with supply-side policies - list

Answer 1

1. Time Lag
2. Inflation
3. Budget deficit
4. Sustainability and environmental concerns
5. Unintended consequences and side-effects of deregulation
6. Misjudged policies may not work

Question 2

Potential problems with supply-side policies - time lag

Answer 2

> Many supply-side policies involve implementing a government project that might take many years to materialise.

Question 3

Potential problems with supply-side policies - inflation

Answer 3

> Any policy that increases AD, either by increasing spending or reducing tax rates could cause inflation, especially if the economy is operating at full employment.

Question 4

Potential problems with supply-side policies - budget deficit

Answer 4

> Supply side policies often involve spending more or taxing less, in other words running a budget deficit.
This will likely lead to increased national debt and an opportunity cost in terms of less government spending and more tax in the future.

Question 5

Potential problems with supply-side policies - sustainability and environmental concerns

Answer 5

> Any policy that encourages economic growth may have significant costs attached to it in terms of depletion of resources which may, in the very long run, lead to a fall in capacity.
Additionally, any policy that involves destruction of environment and natural habitat may lead to the loss of resources that are more valuable than the increased productivity we gain.
Tourism, policing of protests.
Weighing up the value of what is gained and what has been lost can prove very difficult.

Question 6

Potential problems with supply-side policies - unintended consequences and side effects of deregulation

Answer 6

> Deregulation may make it easier for firms to operate in an industry and increase competition but the regulations that are removed presumably served a valuable purpose.
The costs in terms of standards of living and sustainability may be greater than whatever has been gained by removing the regulation.

Question 7

Potential problems with supply-side policies - misjudged policies may not work

Answer 7

> A government may increase spending in a certain field to increase capacity or reduce structural unemployment but if the economy or global economic climate are misjudged by the government then these policies might not work and may prove very costly.
E.g. transport links to improve factor immobility if there are reasons not understood by the government as to why workers are unwilling to move or commute between towns.
E.g. investment in training of skilled computer programmers might backfire if firms continue to operate abroad because of other factors (such as low coorporation tax) and skilled workers simply emigrate.