Macro 17 - supply side policies

Question 1

Define supply side policies?

Answer 1

Policies aimed to increase the LRAS.

Question 2

what happens if supply side policies are successful?

Answer 2

• Increase in productive potential.
• Decrease PL.
• Economic growth.
• Lower unemployment.

Question 3

explain the 2 types of supply side policies?

Answer 3

1. Interventionist - government is actively intervening and adds .
2. market based - reforming the market through deregulation.

Question 4

difference between reforms and policies?

Answer 4

• reforms are undertaken by private firms as they must maintain efficiency and remain competitive.
• policies are undertaken by the government to improve the supply side of the economy and enabling desirable outcomes.

Question 5

impact of supply side policies on the economy on a diagram.

Answer 5

Shift AS to the right.
(both classical and keynesian diagrams)

Question 6

5 characteristics in which supply side policies are split into?

Answer 6

1. Does it promote competition?
2. Does it give incentives to people/firms?
3. Does it reform (deregulate) the labour market?
4. Does it improve skills or human capital?
5. Does is improve infrastructure in a country?

Question 7

What does a shift in AS also mean for PPF?

Answer 7

Shifts PPF to the right as well.

Question 8

explain and evaluate “Education and training” as an example of supply side policy?

(Interventionist)

Answer 8

• Invest in education, more educated people.
• Increase in the quality and quantity of FOP.
• Higher paying jobs due to more skill.

APP:
- Rishi sunak making it compulsory to study math until 18.
- Productivity puzzle.
- More spending on STEM subjects.

EVAL:
- Costs money to intervene, UK’s debt level is very high (101٪ of GDP). Uk has an objective to reduce national debt.
- There is an opportunity cost, healthcare is underfunded, long waiting lists for surgery.

Question 9

explain and evaluate “minimum wage reduction” as an example of supply side policy?

(market)

Answer 9

As MW falls, there is an extension along the demand curve, because firms hire more workers as COP have fallen. Contraction along the supply curve as there is less incentive to work, so people drop out of the labour market. And unemployment falls because firms can hire more workers as it incentivises expansion.

Eval:
- People may fall down tax brackets.
- Less VAT revenue because less AD.
- Very little link between unemployment and MW, when UK introduced MW in 1998 and until 2007, the economy was growing at a good pace and unempllyment was low.

Question 10

explain and evaluate “reduction in indirect taxes” as an example of supply side policy?

(market)

Answer 10

• Fall in income tax.
• Incentivises people to work.
• increase in quantity of labour.
• increase in productive capacity.

Eval:
- If benefits are high, people may still stay on benefits instead of working.
- Fiscal drag in the UK discourages people to work, especially low income earners.
- No room to cut taxes - Cutting taxes with create a hole in government finances. Spending will need to be financed by borrowing if taxes are cut.

Question 11

explain and evaluate “reducing benefits” as an example of supply side policy?

(market)

Answer 11

Incentivises people to work as they are getting less benefits which increases labour force and thus increasing productive capacity.

Eval:
- depends on the extent of reduction.
- Living standards fall, increased poverty. Because some people may not have skills to get a decent job, means they lose their safety net.
- Increased inequality.

Question 12

explain and evaluate “deregulation of product markets” as an example of supply side policy?

(Market)

Answer 12

-Barriers/regulation is reduced to allow firms to enter the market.
- This incentivises many businesses tro join.
- Reduces price and increases quality of products due to competition and differentiation.

Eval:
- Businesses may not enter due to fear of being outcompeted.
- Affects sustainability.
- Regulation is important as it improves safety.
- Could increase negative externalities.

Question 13

explain and evaluate “privatisation” as an example of supply side policy?

(market)

Answer 13

• Privatisation complements deregulation, you cant get deregulation without privatisation.
• Govt sells assets to private sector.
• Private sector is more efficient due to profit incentive.
• Lowers prices, increases quantity and quality of G+S.

Eval:
-Loss of government revenue in the long run.
- More prone to compromise health and safety costs.

Question 14

explain and evaluate “improving infrastructure” as an example of supply side policy?

(interventionist)

Answer 14

• Govt spending to improve infrastructure and transport.
• Reduces costs for firms.
• Causes more investment from firms.

Eval:
- In crowded countries like the UK, it is hard to improve transport due to overcrowding.

Question 15

explain and evaluate “Reducing trade union power” as an example of supply side policy?

(market)

Answer 15

• Increases efficiency for firms.
• Reduced real wage unemployment (if labour markets are competitive).

Eval:
- Hard to reduce the power of trade unions especially if their demands are not being met.

Question 16

explain and evaluate “Government intervention in the form of subsidies” as an example of supply side policy?

(interventionist)

Answer 16

• Government offers subsidies.
• Cuts costs of production.
• Profit incentive.
• Greater quantity and quality of G&S.

Eval:
- Firms may choose to keep the subsidy rather than increase supply.

Question 17

explain and evaluate “R&D grants” as an example of supply side policy?

(interventionist)

Answer 17

• Allows firms to produce greater quantity and quality of G&S.

Eval:
- Firms may not increase quality of goods as this would increase costs of production.

Question 18

explain and evaluate “increasing competition” as an example of supply side policy?

(market)

Answer 18

• More competition leads to lower prices.
• This is increases quantity and quality of G&S as firms want competitive advantage.

Eval:
- An increase in competition disincentivises new firms to join and those firms may move to more profitable markets.

Question 19

Example of labour market deregulation?

Answer 19

Making it easier to hire and fire workers.

Question 20

Example of product deregulation?

Answer 20

Removing laws and regulation about health and safety.

Question 21

what is bureacuracy?

Answer 21

excessive paperwork.

Question 22

examples of interventionist policies implemented in the uk?

Answer 22

come back to finish - take notes from mandem.

Question 23

examples of reforms implemented in the UK?

Answer 23

come back to finish - take notes from mandem.

Question 24

what type of policy are zero-hour contracts and example of?

Answer 24

Deregulation.
(flexible labour markets)

Question 25

What is the aim of zero hour contracts (deregulation)?

Answer 25

Decrease COP for firms.
Ultimately reducing unemployment levels.

Question 26

illustrate the economy being recession-proof on a diagram?

Answer 26

Question 27

what is the diagram showing?

Answer 27

1. market equilibrium.
2. AD shifting left due to demand side shock, resulting in excess supply.
3. flexible labour markets allow firms to fire employees easily.
4. If workers are fired or willing to take pay cuts, it will reduce COP for firms.
5. INflation has fallen to P3 and output remains the same without any government intervention.

Question 28

What is the neo-classcial belief of the market?

Answer 28

The market always clears and comes back to full employment.

Question 29

Why may the market not clear?

Answer 29

• People may not take pay cuts.
• Firms may be unwilling to hire workers due to lack of confidence in a recession.
• People will be protected by trade unions.

Question 30

Explain “may have no impact on economy” as a limitation of supply side policies?

Answer 30

Increasing productive potential of the economy is no good if there is not enough AD - could lead to deflation.

Question 31

Explain “expensive” as a limitation of supply side policies?

Answer 31

Investment in capital goods and education costs money and may not be feasible at times when the governments wants to reduce national debt.

Question 31

Explain “time lag” as a limitation of supply side policies?

Answer 31

Education and training takes time and is unlikely to yield quick results.

Question 32

Explain “impact on equality” as a limitation of supply side policies?

Answer 32

Unintended consequences such as inequality and lower standards of living.

Question 33

define Productivity?

Answer 33

Output per worker/capital per time period.
- Measures how efficient an economy is in producing an increased number of G&S with the same resources.

Question 34

5 ways productivity impacts the economy?

Answer 34

1. Economic growth without increasing size of the population.
2. Low inflation - because reduced prices are passed on.
3. Better living standards.
4. Exports become more competitive.
5. higher unemployment (neagtive).

Question 35

reasons for low productivity in the UK?

Answer 35

1. Low investment - capital goods increase the rate at which goods are produced.
2. cultural factors- more socialising in the workplace in the UK.
3. Education improves productivity and increases human capital - can produce faster if human capital is skilled.
4. brain drain.
5. decline of the manufacturing industry - no skills for service sector.

Question 36

what can the UK government do to improve productivity?

Answer 36

1. Increase investment - government and private sector.
2. Investment in education - maths and science teachers.
3. Increase wages.
4. Improve training.
5. subsidies.
6. reduce interest rates