Supply-side Policies

Question 1

Supply-side policy

Answer 1

Government policies that aim to increase productive capacity of the economy by improving the quality and quantity of FoPs
Designed to shift LRAS right, promoting economic growth without inflationary pressures

Question 2

Why they are important

Answer 2

Trade balance improves
Budget deficit improves
Enhanced economic growth
Decreases inflation (positive disinflation)
Productivity (creation of employment)

Question 3

Market-orientated policies

Answer 3

Involve reducing government intervention to create a more efficient market environment, such as deregulation, tax cuts and privatisation
e.g. change to pension rules, decrease in corporation tax

Question 4

Interventionist policies

Answer 4

Involve direct government intervention to correct market failures, such as investing in education, infrastructure and healthcare
e.g. new voluntary employment schemes for disabled people, increased spending on mental health, enhanced credit for research-intensive businesses

Question 5

Effectiveness of supply-side policies

Answer 5

Very effective when AD is at full capacity
Partially effective when AD is at bottleneck
Ineffecive when AD is at spare capacity

Question 6

Effectiveness depends on:

Answer 6

Time lag - how quickly the policy impacts AS
Level of spare capacity / output gap - current state of economy (S-SP are effective in booms but ineffective in recessions)
Productive capacity - how large the effect will have on productive capacity (e.g. computer courses vs origami courses)
Conflict of objectives

Question 7

Supply-side policies chains of reasoning

Answer 7

Investment in education and training: improves quantity and quality of workforce so shifts LRAS outwards (time lag)
Income and corporation tax cuts: Investment, FDI and consumption increase, giving firms more profits, firms can invest in vocational training, quantity and quality of workforce increase, LRAS and AD shift out (budget deficit worsens, inequality, inflation)