3.7 Supply-Side Policies (DP IB Economics: SL): Flashcards
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Define supply-side policies.
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Cards in this collection (25)
Define supply-side policies.
Supply-side policies are policies that aim to increase the long-run aggregate supply (LRAS) of an economy.
What are the two categories of supply-side policy?
The two categories of supply-side policy are market-based and interventionist.
Define interventionist supply-side policies.
Interventionist supply-side policies require government intervention to increase the full employment level of output.
Market-based supply-side policies aim to remove obstructions in the that are holding back improvements to long-run potential.
Market-based supply-side policies aim to remove obstructions in the free market that are holding back improvements to long-run potential.
True or False?
Supply-side policies work by shifting the aggregate demand curve.
False.
Supply-side policies aim to shift the long-run aggregate supply (LRAS) curve, not aggregate demand.
How do successful supply-side policies affect economic growth?
Successful supply-side policies raise potential national output, leading to higher real GDP and long-term economic growth.
How do supply-side policies often affect the redistribution of income?
The redistribution of income often worsens, as wages fall and government tax revenue falls too.
Define national minimum wage.
A national minimum wage is a legally imposed wage level, set above the market rate, that employers must pay their workers.
How does cutting income tax act as a market-based supply-side policy?
Cutting income tax increases incentives to work, as workers keep more of their earnings, which raises productivity.
Privatisation encourages new firms to enter the market and compete, thus increasing the in the economy.
Privatisation encourages new firms to enter the market and compete, thus increasing the aggregate supply in the economy.
Which interventionist supply-side policy raises the quality of the workforce?
Government spending on education and training raises the quality of the workforce and improves productivity.
True or False?
A successful supply-side policy raises output while lowering the average price level.
True.
A rightward shift of LRAS increases output (from YFE to YFE1) while average price levels fall.
Privatisation encourages new firms to enter the market and compete, thus increasing the in the economy.
Deregulation is the removal of regulations, which lowers firms' costs of production and may increase supply.
Why can supply-side policies also have a short-term demand-side effect?
Many require government spending, which is a component of aggregate demand, boosting national output in the short term.
Supply-side policies often take years to complete, but once finished they add extra to the economy.
Supply-side policies often take years to complete, but once finished they add extra productive potential to the economy.
Define time lags in the context of supply-side policy.
Time lags are the significant delays between expenditure on a supply-side policy and seeing its benefits.
How can an education subsidy have a supply-side effect?
An education subsidy improves human capital in the long term, which boosts productivity and output.
True or False?
The supply-side benefits of a fiscal policy appear immediately.
False.
The fiscal expenditure is short term (annual), but the supply-side impact occurs in the long term.
Why do market-based supply-side policies place no burden on the government budget?
They rely on freeing up markets and letting market forces drive efficiency, so no government spending is required.
It is argued that the best government spending boosts AD in the short term but increases in the long term.
It is argued that the best government spending boosts AD in the short term but increases LRAS in the long term.
Define vested interests in the context of supply-side policy.
Vested interests can lead to less effective outcomes, such as privatised assets being sold to preferred bidders at a knock-down price.
Why do many economies fail to fully develop their supply-side policies?
Because of constant political change and the associated shifts in government priorities.
True or False?
Interventionist supply-side policies are cheap to implement.
False.
They are expensive to implement, funded through tax revenue or increased government borrowing.
What environmental drawback can large infrastructure projects have?
They almost always create negative externalities, such as a hydroelectric dam damaging the surrounding ecosystem.
Give one advantage of interventionist supply-side policies.
They give direct support to sectors important for growth, which can reduce unemployment and increase exports.
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