Supply side policies

What are the two types of supply side policy?

• interventionist

• market base

What is interventionist policy?

when the government increases its intervention in the economy to help increase AS

e.g spending more on infrastructure like roads to reduce firms transportation costs

What is market base policy?

when the government decreases its intervention in the economy and allows the market to operate freely to help increase AS.

e.g decreasing fuel tax to help reduce the cost of fuel

Which type of policy is infrastructure spending an example of?

Infrastructure spending, such as spending on roads and railways, is an interventionist supply side policy as the government is getting actively involved in increasing aggregate supply.
NB Monetary policy is to do with changing interest rates and money supply.

How much is the government spending on HS2?

£75bn

What is the likely impact of government funded infrastructure projects?

An increase in geographical mobility of labour will shift out the long run aggregate supply curve

What is the likely impact of an increase in long run aggregate supply due to government infrastructure spending?

increase in real GDP

What can negatively occur as a result of an increase in government spending on infrastructure?

Crowding out occurs when government spending pushes up demand for resources which increases their price. For example, they will spend money on workers to build infrastructure which will push up wages. Or they will borrow money which will push up the interest rate. This makes it more expensive for private sector firms to invest and so they have been crowded out.

Explain one advantage and one disadvantage of increased government spending on infrastructure as a supply side policy.

Infrastructure projects such as HS2 improve the geographical mobility of labour, increasing the productivity of labour and causing the LRAS to shift out. Another advantage is that it increases aggregate demand as increases in employment will increase consumption. Both the increase in LRAS and AD will lead to economic growth.

However, a disadvantage is that government spending on infrastructure might crowd out private firms. By borrowing money to spend on new infrastructure, the government is increasing the demand for borrowed money, land, labour and capital. This increases prices for each factor of production, increasing costs for firms. This shifts the SRAS in and reduces real GDP.