to expand the productive capacity of the economy (increase the trend rate of economic growth)
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basis
is about governments creating the right conditions for the economy to grow
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why are most supply side policies microeconomic
because they target individual markets which then combine to affect AS
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supply side policies may be...
market based or interventionist
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market based policies
policies designed to remove barriers to the efficient working of free markets. These barriers limit output and raise prices
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interventionist policies
these are policies designed to correct market failure. This means the government intervening in free markets to change the outcome from that which it would otherwise have been.
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examples of supply side policies
increasing incentives
reforming the labour market
improving the skills and quality of the labour market
improving infrastructure
encouraging the growth of small and medium sized businesses
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increasing incentives
exist to encourage people to work and businesses to invest, such as:
reducing welfare benefits
lowering taxes on profits so that firms have more left over to invest.
incentives can be too big or too small
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reforming the labour market
LRAS is significantly influenced by the quantity of labour in markets and the productivity of that labour. the more flexible the labour market, the lower the level of unemployment.
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in order to reform the labour market and increase flexibility, governments can improve:
improving the skills and quality of the labour market
the quality of a labour force can be improved by investment by improvement in human capital such as
education
training
immigration
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improving infrastructure
poor infrastructure in an economy can lead to low productivity and labor immobility
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encouraging the growth of small and medium sized businesses
they can provide new jobs and become the big businesses of tomorrow. governments tend to encourage the setting up of new businesses through various schemes. 'red tape' is often less then it is for large firms.
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weaknesses
requires a fine balance to ensure that the policies are carefully designed
it can take a long time to see results
there can be unintended consequences
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strengths
the current account of the balance of payments should improve because of increased international competitiveness
cost push inflation could be reduced
unemployment should fall as the economy falls
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Other cards in this set
Card 2
Front
basis
Back
is about governments creating the right conditions for the economy to grow
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