Economic HL - Semester 2 Term 4 (3.7, 3.4,

Goals of Supply Side Policy (5)

1. Promote long-term growth by increasing the productive capacity of the economy.

2. Improve competition and efficiency

3. Reduce the cost of labor and

Market Based Supply Side Policy (3)

1. Policy to encourage competition

2. Labour Market:

3. Incentives-related policies

   1. Personal income tax cuts

   2. Business tax cuts

   3. Capital gain tax cuts

Policy to encourage competition

1. Privatization

2. Deregulation

3. Trade liberation

4. Anti-monopoly regulation

Labour Market

1. Reduce the power of trade union

2. Reducing unemployment benefits

3. Abolishing minimum wages

4. Reducing Job Security

Incentives-related policies

1. Personal income tax cuts

2. Business tax cuts

3. Capital gain tax cuts

Interventionist

1. Investment in Human Capital: Training and Education

2. Investment in New Technology: R&D

3. Investment in Infrastructure: Better infrastructure → Improve labor productivity.

4. Industrial Policies: Government policies designed to support the growth of the industrial sector in economy.

Interventionist Supply Side Policy (Overlaps of supply side policy)

When the government invests on human capital, new technology, or infrastructure it will shift the LRAS to the right.

• However, all of these activities will increase gov spending, thus shifting the AD to the right.

Market Based Supply Side Policy (Overlaps of Demand side policy)

Incentive-related policies (eg lower taxes, etc) are intended to encourage investment and then shift LRAS to the right.

• However, it will also increase disposable income, and raise investment and consumption thus shifting AD to the right.

Overlaps of Supply side policy, and fiscal policy

Gov spending on education, health, and training will improve human capital quantitiy and quality. This will increase LRAS.

• Government spending for provision capital goods (infrastructure and R&D) will improve physical capital quantity and quality, this will increase LRAS.

Overlaps of Supply side policy, and Monetary policy

When Interest rate falls, encourage spending on capital goods by firms. When qty of capital goods increase, LRAS increase.

Constraints of Market Based SUpply Side Policy (5)

1. Time lag: Policy works after significant periods of time

2. Equity issues: More competition leads to more people becoming unemployed.

3. Government budgetL Tax cut might reduce government revenue to fund their expenditure

4. Vested interest: A strong personal interest in something. Market based policy creates environment where different interest will direct the action to support or prevent the policy from being implemented.

5. Effect on the environment: Increasing potential output come with a huge opportunity cost to the natural environment.

Constraints of Interventionist Supply Side Policy (2)

1. Time lag: It takes time to reap the benefits of investment (ex: education improvement)

2. Costly: Funded using government spending, this can create a budget deficit which can increase the burden to pay the debt, and interest in the future.

Strengths of Market Based Supply Side Policy (3)

1. Improved resource allocation: Focus on improving the working market system will result in improve efficiency in resource allocation.

2. Ability to create employment: Labor market that more responsive to the market force, may contribute in reducing the NRU.

3. Ability to reduce inflationary pressure: Increasing potential output will shift the LRAS.

Strengths of interventionist Supply Side Policy

1. Direct support of sectors important for growth: Gov decides the particular sectors to promote which may be important for growth.

2. Ability to create employment: Enable workers to acquire skills, provide assistance to workers, to relocate.

3. Ability to reduce inflationary pressure: Increasing potential output will shift the LRAS.

4. Possible positive impact on equity: Investment in human capital.