government policies

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Supply-Side policy

Types of Supply-Side policies

Market based

Supply-side policies are believed to achieve rapid growth, price stability and full employment at the same time.

Encouraging competition Privatisation Deregulation Private financing of public sector projects Contracting out to the private sector (outsourcing) Restricting monopoly power Trade liberalisation Labour market reforms Abolishing minimum wage legislation Weakening the power of labour (trade) unions Reducing unemployment benefits Reducing job security Incentive-related policies Lowering personal income taxes Lowering taxes on capital gains and interest income Lowering business taxes

Interventorist

Policies that are created because many believed that free market cannot increase the total potential output in a desired result.

Investment in labour: education and health services Training and education Improved health care services and access to these Investment in capital New technologies Investment in land Industrial Policies Support for small and medium-sized enterprises or firms (SMEs)

Supply-side policies focus on increasing the quantity and quality of factors of production and shifting the long-run aggregate supply (LRAS) or Keynesian AS curves to the right, which indicates an increase in the potential output and achieve long-term economic growth.

Monetary Policy

Pros: Controls inflation, can be implemented easily, politically independent. Cons: Time lags, affects the whole country(even if it's not necessarily needed)

Monetary policy and AD

Contradictory

Decrease in money supply to decrease AD

Increase in money supply to increase AD

Central banks

Are responsible for looking after the money received by the government.

Control Interest rates and money supply

Interest rates

Interest rate is cost of borrowing money and gain from saving money.

Point of Monetary policy is to change interests rates and money supply to influence aggregate demand

Fiscal policy

Pros: directly affects AD, limits recession, is targetable, promotes long term economic growth. Cons: has time lags, affects and affected by politics, is infexible.

Fiscal policy and LRAS

Government intervention to increase LRAS. LRAS is a potential output. Potential output is an output of the economy if it were appearing at full capacity and emplyment.

Fiscal policy and AD

Contractionary

Government intervention to decrease AD

Expansionary

Government intervention to expand AD

Subtopic

Budget deficit is when total expenditure> total tax revenue Budget surplus is when total expenditure

Government revenue: Direct taxes( taxes on income) indirect taxes ( taxes on expenditure),sales of good and services

Government spending : Current( spending on factor payment and goods) Capital( investment, spending on assets),Transfer payment ( a payment from government to individual, no output is generated)

Definition: use of government spending and taxation to influence AD, raised revenue, redistribute income