5.2 Supply-Side Policies Flashcards Preview

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Flashcards in 5.2 Supply-Side Policies Deck (24)
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1
Q

Supply-side policies definition

A

Deliberate actions taken by the government designed to increase the LRAS of the economy

2
Q

Supply-side improvements definition

A

These arise out of general increases in productive capacity resulting from businesses acting out of their own interest in improving efficiency and the quantity of their output

3
Q

What is the link between supply-side improvement and supply-side policies?

A

Direct supply-side policies adopted by the government will also lead to supply-side improvements

4
Q

Effects on GDP from supply-side policies

A
  • increasing the capacity of the economy should lead to higher GDP
  • increase trend rate of growth
  • needs to be used in conjunction with AD boosting policies to increase GDP
5
Q

Effects on unemployment from supply-side policies

A

lower unemployment from:

  • lower income tax + reduced welfare benefits = more people wanting to work + work harder
  • improvements in education and training
  • investment in infrastructure = attract more businesses to the UK
6
Q

Effects on inflation from supply-side policies

A

Lower inflation from:

  • more capacity = AD has less pressures = less demand-pull inflation
  • deregulation = more competition = less monopolistic power, so prices don’t rise as easily
7
Q

Effects on the balance of payments on current account from supply-side polices

A

Improvements to the balance of payments from:

  • downside pressure on inflation = exports more price competitive
  • a more productive workforce should also lead to lower priced goods = cheaper
  • quality of output should improve with education and training = increase demand for UK exports
8
Q

Free market supply-side polices definition

A

Those policies designed to make markets work more efficiently and thus increase aggregate supply for the economy

9
Q

Privatisation definition

A

The sale of state-owned enterprises to the private sector

10
Q

Deregulation definition

A

The removal of barriers to competition in an industry

11
Q

Ladder curve definition

A

Shows how high income tax rates can actually reduce tax revenue due to the reduced incentive to work

12
Q

What graph shows how reducing income tax will increase tax revenues

A

The laffer curve

13
Q

Describe how the Laffer curve works

A

If tax revenues are cut down towards T* then taxes revenues actually increase as there is now a greater incentive to work as they keep more of their earned money = decreases voluntary unemployment + more people working = more money spend on goods and services that could have VAT

14
Q

Free market supply-side policies

A
  • income tax cuts
  • reduction or elimination of minimum wage legislation
  • reduction in unemployment benefits
  • reduction in labour protection
  • zero-hour contracts
  • privatisation
15
Q

How does reduction in labour protection improve the supply side of the economy?

A

By reducing things such as sick pay, holiday pay ect. It reduces cost for firms = they can employ more workers

16
Q

How does privatisation improve the supply side of the economy?

A
  • moving businesses into the private sector increases efficiency as private businesses will pursuit profit max
17
Q

Interventionist supply-side policies definition

A

Designed to increase aggregate supply by intervening more in markets, often accompanied by higher targeted government expenditure

18
Q

Interventionist supply-side policies

A
  • education
  • training
  • industrial policy
  • research and development subsidies
19
Q

How does education and training improve the supply-side of the economy?

A
  • giving the worker force a better set of skills = reduce occupational immobility + structural unemployment
  • increase productivity of the workforce = increase the productive capacity of the economy
20
Q

What are industrial policies?

A
  • they are changes in legislation affecting the labour market
    E.g = tax breaks, grants to businesses
21
Q

What is the natural rate of unemployment?

A

The rate of unemployment that exists because of structural and frictional causes

22
Q

Policies that specifically reduce the natural rate of unemployment

A
  • improvements in education reduced occupational immobility as workers have a larger variety of skills
  • higher investment in transport infrastructure = reduces geographical immobility as workers find it easier to move to vacancies elsewhere
  • lower taxes on incomes + reduce benefits = incentivise work
23
Q

What is the natural rate of unemployment in the UK?

A

5%

24
Q

What are the limitations of supply-size policies?

A
  • cutting benefits is likely to increase poverty
  • reducing the rights of workers may prove unpopular with workers
  • these policies may take years to show significant effect
  • reducing the rate of tax can lead to a more unequal distribution of wealth