Topic 4.3 Supply-Side Policies

Question 1

Supply-side policies

Answer 1

Policies designed to increase the productive capacity of an economy, shifting LRAS to the right
- If successful all 4 main macroeconomic objectives will improve

Question 2

What causes LRAS to shift to the right

Answer 2

An increase in the quality or quantity of factors of production
An increase in productive efficiency (a decrease in long-run costs within the economy)

Question 3

Types of supply-side policies

Answer 3

Interventionist SSP
Market Based SSP (originate from government i.e try to get free-market)

Question 4

Interventionist SSP

Answer 4

This promotes more of a role for a government in the economy:
1) Govt spending on Education/Training (increases the quality of the workforce)
2) Govt spending on infrastructure (Long-run costs fall as it’s easier/cheaper to access raw materials and sell)
3) Subsidies to firms to promote investment. (spends on capital goods, increases quantity, quality and lower LR costs)

Question 5

Market-Based SSP and Types

Answer 5

These aim to reduce the role of government intervention and rely on free-market mechanisms to improve economic efficiency/productivity.
1) Tax policies
2) Labour market policies
3) Product market policies

For example, Margaret Thatcher privatised industries such as British Telecom, British Airways and British Gas in order to increase productivity/competitiveness.

Question 6

Tax policies (to lower them)

Answer 6

This is a market-based suppy side policy
1) Lower income tax
2) Lower corporation tax
NB: this seems like expansionary fiscal policy but the type of policy it falls under depends on the main objective. If it’s to shift AD right then EFC, if to shift LRAS right then MBSSP

Question 7

Labour market policies

Answer 7

This is a market-based supply side policy
1) Reduce benefits (widening the gap between benefits and wages boosts work incentives. Increases quantity of labour)
2) Reduce minimum wages
3) Reduce Trade Union Power
2 and 3 increase the costs of production for businesses which can reduce long-run costs in the economy and shift LRAS to the right

Question 8

Product market policies

Answer 8

This is a market-based supply side policy. These aim to increase competition within the economy which means firms have to decrease LRC to remain competitive.
1) Privatisation (motivation of profit to improve efficiency/competitiveness)
2) Deregulation (removes barriers to entry thus increases competition)

Question 9

Evaluation of SSP

Answer 9

1) No guarantee of success
2) Cost
3) Time lags (decades for infrastructure, education - takes time to see effects)
4) Negative stakeholder impacts (lower benefits/minimum wage lowers standard of living - harms society LMP)
5) Stage of economic activity (Recession: supply-side policies useless but at full productive capacity then yes)
6) Need to be targetted/solve specific problems.