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Section 9 - Macroeconomic policy instruments - Coggle Diagram
Section 9 - Macroeconomic policy instruments
Supply side policy
Basics
Expand the productive potential of an economy, make it more robust/ flexible
Governments create the right conditions to allow market forces to create growth
Structural changes are mad allowing higher efficienvy/ productivity
Free market supply-side policy - increase efficiency by removing things which interfere with the free market like privatisation and tax cuts
Interventionist supply-side policy - correcting market failure by increasing government spending on education, subsidies for research
Aims
Increase incentives by encouraging spending
Promote competition, reducing monopoly power and improve economic efficiency
Reform the labour market, by reducing trade union power which makes workers less restrictive. They could also subsidise relocation of workers to improve geographical mobility
Improve skills and quality of the labour force - subsidise training and spending more on healthcare can improve the quality of labour force
Improve infrastructure - improve roads and schools
Limitations
Not as good as demand side policies as dealing with cyclical unemployment which can reduce the size of a negative output gap
Significant time lags
Reducing the rate of tax could leads to a more unequal distribution of wealth
Policies
Privatisation
Firm changing from public sector run to private sector
Private sector is more efficient and less wasteful
Deregulation
Removing 'red tape' that restricts competition
More competitions leads to increase efficiency
NMW
Greater reward for doing a job that pays NMW
Government would have to pay less through benefits
Increases costs for firms, causing more unemployment and consumers paying higher prices
Increasing labour mobility
Reducing trade union power
More flexible work force allows fire and hiring to meet current demands
Supply side over demand
Income tax cuts have been implemented to give an incentive to work harder rather than increase disposable income
Reductions in business taxes are aimed to provide a risk taking incentive to enrepreneurs
Reductions in welfare benefits aim to increase people's incentive to work rather than stay on benefits
Tax receipts increase
More people in work - more income tax
Businesses are more successful
Successful supply side policy should decrease the budget deficit
Fewer trade offs
Demand side fiscal policy/ monetary policy can lead to inflation
Supply side policy increases the productive potenial which causes an increase in growth, jobs an output
Leads to a shift in LRAS aswell as AS, so less risk of higher inflation
Imports
Make an economy less dependent on imports as high quality goods leads to lower demand for imports
Policy that keeps UK exports competitive are vital for future growth
Won't always work
Demand side policies are needed to support any growth
During a recession when demand is weak, supply side policies may not be appropriate
Supply side policies create long term growth while demand side policies stabilise the economy in the short term
Not perfect
Take many years to solve problems
Can be unpopular, as benefit cuts leads to poorest not being able to cope