2.6.3 Supply-side policies

What is supply-side policy

• Policies that increase LRAS (productive potential) of the economy

  • shifting out LRAS ⮕ influence macroeconomic objectives

• by increasing quantity / quality of factors of production

• For every SSP, at least 2 macro-objectives is influenced

What are supply-side policies categorised into? (There are 2 ways)

1st way:

• Interventionist / Market-based

2nd way:

• Fiscal / Regulatory

  • Fiscal: change government spending / taxation

  • Regulatory: change laws / regulations

Distinction between interventionist & market-based methods

• Interventionist: government is ‘doing more’ than before

  • ie. more spending / more tax / more control

• Market-based: government is ‘doing less’ than before

  • ie. less spending / less tax / less control

What are the 5 SSP policies

• Change visa rules to encourage more skilled worker

  • Increase skill ⮕ increase quality of labour force

  • Interventionist, Regulatory

• Cut corporation tax

  • Increases incentive for firms to invest more ⮕ increases investment ⮕ capital good increases ⮕ potential output increases ⮕ LRAS increases (shifts out)

  • Market-based, Fiscal

• Cut unemployment benefit

  • to reform labour market ⮕ encourages unemployed workers to look for jobs

  • Market-based, Fiscal

• Increase spending on railway network / transportation network

  • to improve infrastructure which firms used to transport raw materials / capital goods

  • Interventionist, Fiscal

• Relax rules for small business in meeting health & safety requirements

  • to promote competition as it decreases cost of production ⮕ increases production & market entry ⮕ competition increases

  • Market-based, Regulatory

Use of AD/AS diagrams to illustrate supply-side policies

Strengths & Weaknesses of supply-side policies

• very expensive

• takes long time to work

  • info delay

  • delay from capital goods (purchasing)

  • cut unemployment benefit ⮕ increase labour but demand for labour might not increase ⮕ ppl can still be unemployed

• bad for worker welfare