Supply side policies,demand-pull inflation and cost-push inflation

Question 1

Define supply-side policies?

Answer 1

Their aim is to increase the productive potential of the economy by increasing quantity/quality of factors of production.

Question 2

Can supply-side policies be interventionist or free market?

Answer 2

yes

Question 3

What is supply-side policies is the main objective?

Answer 3

• to shift LRAS1 TO LRAS2
• When Y1 moves to Y2, unemployment will reduce
• Since P2 will shift down to P1, this means there will be lower inflation which will improve the current account.

Question 4

for the supply-side policy, there’s an acronym you can remember ‘LIFE’?

Answer 4

L: -improvement in education/training-productivity

• Reduction in income tax-incentive for potential workers thus increasing the quantity of labour
• Reduce trade union power-reduce the cost of production because it will increase productive capacity
• Reduce unemployment benefits-reduce the cost of production which will increase productive capacity

Question 5

What does ‘I’ mean?

Answer 5

I: corporation tax is reduced so they will have more retained profits-use it for investments-increase quality and quantity of labor.
Subsidies promote research and development-incentives innovate new tech-quality and quantity of labor will rise.
Privatization- Private sector gets involved aiming for max profits and competition exists

Question 6

What are the main objectives of supply-side policies?

Answer 6

• Reduce unemployment
• reduce inflation
• improve the trading position
• stimulate AD and AS
• government spending on reducing tax
• sustainable

Question 7

What are the cons of supply-side policies?

Answer 7

• Very expensive-OC
• time consuming-effect of education and training
• no guarantee that people will start to work
• will be ineffective and there will be spare capacity

Question 8

For these supply-side policies to work, what does it depend on?

Answer 8

intital level of economic activity so it has to already be close to full employment

Question 9

How can AD be boosted in the short run?

Answer 9

By using expansionary fiscal/monetary policy

Question 10

If they are facing cyclical unemployment how can expansionary/ monetary policy help?

Answer 10

• Policy to increase AD they could:
• increase government spending
• reduce taxation
• reduce interest rates
• increase the money supply

Question 11

What conflict objectives might arise from this cyclical unemployment?

Answer 11

-There may be conflicts with inflation.

Question 12

How can structural unemployment be resolved by using supply-side policies?

Answer 12

• Investment in worker training-gain skills

- remove employer regulation-firms can hire more employers

Question 13

What conflict objectives might arise for structural unemployment?

Answer 13

it can be long-term because of occupational.

Question 14

what happens if it’s geographic immobility-structural unemployment

Answer 14

-grants incentive to move
-low-cost housing
but it can be time-consuming and expensive

Question 15

What does contractionary monetary/fiscal policy do?

DEMAND-PULL INFLATION

Answer 15

• increase taxation
• reduce government spending
• increase interest rates
• reducing the money supply
• increase exchange rates
• these are the policies to reduce inflation

Question 16

But what are the cons of contractionary monetary/fiscal policy?

Answer 16

-growth/unemployment-policy conflict

this depends on economic activity

Question 17

What is the objective of cost-push inflation?

Answer 17

to reduce the cost of production

Question 18

What does cost-push inflation do?

Answer 18

• Gov restricting wage rise
• reduce corporation tax
• subsidies