Supply-side Policies

• What are supply-side policies?

  Government policies to increase aggregate supply
• What is an interventionist policy?

  Government actively increases aggregate supply
• How does increased spending on infrastructure affect firms?

  It allows quicker transport of stock
• What is the effect of infrastructure spending on SRAS?

  It shifts SRAS to the right
• What is the relationship between infrastructure spending and economic growth?

  It leads to economic growth
• What is crowding out in economic terms?

  Government spending increases resource demand
• How does crowding out affect private sector investment?

  It makes investment more expensive
• What are the advantages of infrastructure projects like HS2?

  • Improve geographical mobility of labour
  • Increase productivity of labour
  • Shift LRAS to the right
  • Increase aggregate demand through employment
• What are the disadvantages of infrastructure spending?

  • Crowding out of private firms
  • Increased demand for resources raises prices
  • Higher costs for firms reduce real GDP
• How does reducing corporation tax affect firms?

  It increases their incentive to expand
• What is the impact of lower corporation tax on investment?

  It increases available funds for investment
• What are the advantages of reducing corporation tax?

  • Reduces cost of production
  • Encourages new firms and expansion
  • Increases investment and productivity
• What are the disadvantages of reducing corporation tax?

  • Reduces government tax revenue
  • Opportunity cost for public services
  • Estimated £5bn loss annually since 2010
• What is the effect of reducing the national minimum wage?

  It increases the supply of labour
• What is real wage unemployment?

  Excess supply of labour at minimum wage
• How does a reduction in minimum wage affect consumption?

  It decreases household spending
• What are the advantages of reducing the minimum wage?

  • Decreases cost of production for firms
  • Increases short-run aggregate supply
• What are the disadvantages of reducing the minimum wage?

  • Reduces disposable income for households
  • Decreases aggregate demand
  • Risk of brain drain due to emigration
• What is deregulation?

  Removing regulations to lower entry barriers
• How does deregulation affect SRAS?

  It shifts SRAS to the right
• What is privatisation?

  Transfer of public sector firm to private sector
• How does privatisation affect firm efficiency?

  Increases pressure to profit maximise
• What is the effect of increased education spending on productivity?

  It increases productivity of labour
• What are the advantages of increased education spending?

  • Lowers university course prices
  • Encourages higher education consumption
  • Increases productivity and LRAS
• What are the disadvantages of increased education spending?

  • Short-run decrease in labour supply
  • Increased wages raise production costs
• What is the effect of reducing income tax?

  Increases disposable incomes
• How does reducing income tax affect consumption?

  It increases consumption and AD
• What is the positive multiplier effect?

  Initial injection increases final national income
• What are the advantages of reducing income tax?

  • Increases disposable income
  • Encourages more work hours
  • Decreases cost of production
• What are the disadvantages of reducing income tax?

  • May decrease labour supply
  • Increases wages and production costs
• What is the effect of reforming benefits?

  Increases incentive to work
• How does reducing benefits affect disposable income?

  It reduces disposable income
• What are the advantages of reforming benefits?

  • Increases incentive to work
  • Reduces cost of production
  • Shifts SRAS right
• What are the disadvantages of reforming benefits?

  • Reduces consumption and AD
  • Significant downward multiplier effect
• What is the effect of increased healthcare spending?

  Increases productivity of labour
• What are the advantages of increased healthcare spending?

  • Increases productivity of labour
  • Shifts LRAS to the right
• What are the disadvantages of increased healthcare spending?

  • Spending may be inefficient
  • Limited effects on LRAS