Jan 08 unit 3 investment, balance of payments, supply side, monetary policy, infalation
MACROMACRO. MACROMACRO SUPPLY-SIDE POLICY MACROMACRO Supply Side Policy What are supply side...
-
Upload
judith-hawkins -
Category
Documents
-
view
212 -
download
0
Transcript of MACROMACRO. MACROMACRO SUPPLY-SIDE POLICY MACROMACRO Supply Side Policy What are supply side...
MACRO
MACRO ECONOMI CS
MACRO
SUPPLY-SIDE
POLICY
MACRO
Supply Side Policy
• What are supply side policies? How effective have they been in the UK? ET Sept 2004
• Handout- ‘Supply side policy worksheet’
MACRO
SUPPLY-SIDE POLICY
Increasing the productive capacity of the economy through supply-side measures can be very effective in enabling the government to meet the key macroeconomic objectives.
If an economy becomes capable of producing more products at lower cost, in comparison to its main competitors, the balance of payments on current account position should improve.
Sustained increases in the quality and/or quantity of resources available should increase the trend growth rate.
Increasing the productive capacity of the economy should reduce the risk of inflation.
Improved education, training and health, combined with increased labour market flexibility, should reduce unemployment.
Increasing Long run aggregate supply (LRAS) in an economy can be very effective when AD is at, or very near to, the full employment level (can show using LRAS/AD analysis).
MACRO
Market based supply side policies
• Policies to encourage competition (deregulation, privatisation, trade liberalisation, anti- monopoly regulation)
• Labour Market reform (benefits, TUS, min wage)
• Incentive- related policies (tax cuts)
MACRO
Interventionist Supply Side Policies
• Investment in human capital• Investment in new technology• Investment in infrastructure• Industrial policies
• (s/t impact on AD, long term impact on LRAS)
MACRO
SUPPLY-SIDE POLICY
Limitations to the effectiveness
Increasing LRAS in an economy will not be very effective when AD is below the full employment level (can show using LRAS/AD analysis).
Supply-side policies can take a long time to take effect. For example, improvements in quality of primary education could take a long time to improve the quality of the labour force.
They can be very expensive to implement, supply side policy can be significantly influenced by the government’s budgetary position.
There is no guarantee that they will bring about the desired improvements in the quantity and/or quality of resources available.
Policies may have some undesired effects, consumers and producers may respond to them in unintended ways.
MACRO
Illustrate
• Using the Keynesian LRAS• The position of AD when supply
side policy is• Effective• Most Effective• Not effective
MACRO
SS Policy is effective when the AD curve is positioned on the ‘curved’
part of the LRASPrice
Level
Real GDP
AD
LRAS1
0
LRAS
LRAS
MACRO
Price
Level
Real GDP
AD
LRAS
LRAS
0
LRAS1
SS Policy is most effective when the AD curve is on the perfectly inelastic portion of the LRAS (i.e. when the
economy is operating at full employment)
MACRO
Price
Level
Real GDP
AD
LRAS
LRAS
0
LRAS1
SS Policy is least effective when AD curve is on the perfectly elastic portion of the LRAS curve (when there is a
lot of spare capacity in the economy)