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level: Supply-Side Policies

Questions and Answers List

level questions: Supply-Side Policies

QuestionAnswer
-What does Supply-Side Policies aim for?-This is to Expand Production Potential [Long Run AS] of the Economy, or Increase the Trend Rate of Growth -The Economy being able to pump more Goods out, while still having Demand for such -Government must try to create Growth via allowing the Market to do so. Not by Intervening Directly
What would Supply Side Policies involve?-Structural Changes to the Economy, allowing Individual Parts work Efficiently and Productively -Eg, helping Markets more Efficient, or Creating Incentives for Firms/Individuals to be more Entrepreneurial
What are 1. Free Market Supply -Side Policies 2. Interventionist Supply side Policies1. Increase Efficiency by getting rid of things that Disrupt the Free Market. Tax Cuts, Privatisation, Deregulation and Labour Market Flexibility 2. Correcting Market Failure. Through Expenditure on Education, Subsidies for R&D, Infrastructure Improvements and Industrial Policy
Where can you see some Supply Side Policies in the Product Market?-Incentives for Firms to Invest: Tax Breaks if they Invest Profits back into the Firm instead of Dividends -Trade Liberalisation: Remove Trade Barriers and allow flow of Goods and Capital to Flow Freely -Encourage Competition. This can require Deregulation [Efficiency in Market] Privatisation [Effective if Nationalised Industries are Inefficient] Contract Services out [Private Firms Cary out Government Services] or Support for New and Small Firms
Where can Supply Side Policies be seen in the Capital Market?-Deregulation of Financial Markets [1986 ‘Big Bang’] got rid of a load of ‘Restrictive Practices’ that made British Financial Markets Inefficient
Where can Supply Side Policies be seen in the Labour Market-Reducing Unemployment Benefits: People find Incentives to get Jobs. Also Information on Availability of Jobs -Reduce [Reform] Income Tax. Create Incentives for People to work more -Better Education & Training, giving more People Qualifications, Productivity and Greater Occupational Mobility -Labour Market Flexibility, making it easier for Firms to Remove Workers -Less Rules on Firms, encouraging more Workers and less Costs
How can both Demand and Supply Side be used Together? Use Unemployment as an Example-Loose Fiscal Policy boosting AD can Reduce Unemployment. But this can do Naught to the NRU [Natural Rate of Unemployment] so when the Policy ends, Unemployment may return back to its ‘Pre-Boost Equilibrium’ -So a Supply Side may be used to Reduce the NRU - make it Long lasting. This can be done via Tax Breaks [Firms Invest] & Increased Incentive to Worker -This can hopefully mean the NRU goes Down as well as Unemployment
What are the Benefits of a Supply-Side Policy?-Increasing the Trend Growth Rate allows Governments to Achieve all 4 Macroeconomic Objectives with little Clashes
Why are Supply Side not the Best Solution?-Takes Time to see the Effects of Supply Side Policy, so Economy can’t be Fixed Quickly, -Unintended Consequences. Deregulation of Financial Markets led to 2008 -Can be Unpopular [Benefit Cuts makes the Poorest more Vulnerable] and Inequitable [Flexibility in Labour Market reduces Job Security