2.6.3 Supply-side policies: Practice Questions

• a.

  Increased state spending on vocational training and apprenticeships

• b.

  Providing subsidies to firms for the adoption of new green technologies

• c.

  Government funding for a new high-speed rail network

• d.

  Reducing the power of trade unions to make the labour market more flexible

• a.Increasing the national minimum wage to a level significantly above the market equilibrium to boost worker productivity.
• b.Implementing a temporary reduction in the basic rate of income tax to stimulate consumer spending during a recession.
• c.Providing government-funded training schemes for workers who have been made redundant in declining industrial sectors.
• d.Reducing the power of trade unions and lowering unemployment benefits to increase the incentive for individuals to accept job offers.

• a.They rely solely on the 'trickle-down' effect and therefore do not address regional inequalities or market imperfections.
• b.They are unable to increase the productive potential of the economy because they only affect the demand side (Aggregate Demand).
• c.They often involve significant opportunity costs and may lead to government failure due to inefficient resource allocation or time lags.
• d.They invariably lead to a decrease in the natural rate of unemployment but cause a shift of the LRAS curve to the left.

• a.

  The LRAS curve will shift to the right, but the SRAS curve will only move if there is a change in the price of raw materials.

• b.

  Only the SRAS curve will shift to the right because labour market reforms only affect costs in the short run.

• c.

  Both the SRAS and LRAS curves will shift to the right as production costs fall and the productive potential of the economy increases.

• d.

  The SRAS curve will shift to the left due to industrial unrest, while the LRAS curve remains vertical and stationary.

• a.A reduction in the rate of value-added tax (VAT) to lower the price level and increase the real value of household wealth.
• b.Investment in human capital and education to improve labour productivity and reduce structural mismatches in the labour market.
• c.The introduction of a regressive tax system to increase the disposable income of high-income earners and encourage saving.
• d.A significant increase in the money supply through asset purchases to lower the cost of borrowing for firms.

Write your answer out first, then check it against the worked solution.