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Unit 5.24

Supply-side policies aim to enhance aggregate supply by improving product and factor markets, with tools such as education, infrastructure development, and tax cuts. These policies can lead to long-term benefits like economic growth, reduced inflation, and lower unemployment, but their effectiveness may vary in the short run. Challenges include the quality of education, timing of infrastructure projects, and the need for sufficient aggregate demand to utilize increased productive capacity.

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21 views10 pages

Unit 5.24

Supply-side policies aim to enhance aggregate supply by improving product and factor markets, with tools such as education, infrastructure development, and tax cuts. These policies can lead to long-term benefits like economic growth, reduced inflation, and lower unemployment, but their effectiveness may vary in the short run. Challenges include the quality of education, timing of infrastructure projects, and the need for sufficient aggregate demand to utilize increased productive capacity.

Uploaded by

ujjesha giri
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Supply-side policy

Unit 5.24
Supply side policy objectives
• Governments use supply-side policies to increase aggregate supply by
improving the workings of product and factor markets,
• Sometimes supply-side policy tools will reduce government
intervention and some times it results in increased government
intervention.
• Supply-side policy tools seek to increase productive capacity and so
shift the economy’s long-run aggregate supply (LRAS) curve to the
right.
Supply-side policy tools
• Education and training
• Promoting infrastructure development
• Support for technological improvement
• Cuts in corporate tax
• Cuts in income tax
• Trade union reform may increase workers’ flexibility and mobility
• Privatization and deregulation
• Encouragement of immigration
The impact of supply-side policy tools on the
macro economy
• Supply-side policy tools have the potential to benefit all of a
government’s policy objectives in the long term. They can raise
economic growth, reduce inflationary pressure and lower
unemployment.
*The impact on national income and real output
*The impact on employment
*The impact on the price level
The effectiveness of supply-side policies
Spending on education and training has the potential to be very
effective in the long run because such spending may directly increase
the quality of labour and productive capacity.
However, it may not be very effective in the short run, as it can take a
long time to have an effect. In the short run, it may also contribute to
inflation.
• Providing more education and training may not be very effective if it
is not of a high quality or it develops skills that will not be in demand
in the longer term.
• In addition, increased spending on training may be successful in
raising the skills of workers, but if their pay rises by more than their
productivity, costs of production will still rise.
• Infrastructure development can be expensive and can take
considerable time to construct. By the time it is built, demand for rail
transport may have changed.
• Transport infrastructure development may not always be well linked
and may also have harmful effects on the environment.
• Impact of technological improvement is often beneficial. However, its
benefits are not always evenly spread and can be harmful to some.
Technological improvement involves change.
• New products and new methods of production are created. So some
people may have to lose or change jobs and move to different areas.
• Any supply-side policy tool which increases aggregate supply may not
raise output if the economy is not initially operating with spare
capacity
• It will increase productive potential but will not be used if there is not
enough aggregate demand.
• Firms may be capable of producing more, but they will not do so if
they do not expect to sell any extra output.

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