4.5 - Supply-side policy
4.5.1 Definition of supply-side policy
Definition
● No contractionary monetary policy
● Supply side policies (SSP) are a combination of government policies, aiming to
increase the productive capacity of the country (AS)
● PPC → shift outwards → AS ↑ to the right
4.5.2 Supply-side policy measures
Supply-side policies include:
1) Education and training (↑ Quality of labour)
2) Labour market reforms
3) Selective tax incentives (e.g lower direct tax) (↑ capital)
4) Deregulation
5) Improving incentives to work and invest (e.g provision of subsidies, competition
supply)
6) Privatisation (vs. nationalisation)
Education and training
● This will improve FOP - labour
● More skilled workers → ↑ overall productive capacity within a country
● Skilled workers are needed to adapt to new production methods + new
technologies
● Government can:
○ Fund private sectors to have their own training programme
○ Fund universities by allowing more students to enrol
Labour market reforms
● By changing the labour market to be more flexible, it can help employers to hire
more efficient workers
● This is done by:
1) Reducing the power of the trade unions
2) Reducing unemployment benefits
3) Minimum wage laws
Selective tax incentives
● Tax cuts targeting different groups of workers can encourage them to ↑
productivity and expand productive potentials
● This can be done by:
4.5.1 Definition of supply-side policy
Definition
● No contractionary monetary policy
● Supply side policies (SSP) are a combination of government policies, aiming to
increase the productive capacity of the country (AS)
● PPC → shift outwards → AS ↑ to the right
4.5.2 Supply-side policy measures
Supply-side policies include:
1) Education and training (↑ Quality of labour)
2) Labour market reforms
3) Selective tax incentives (e.g lower direct tax) (↑ capital)
4) Deregulation
5) Improving incentives to work and invest (e.g provision of subsidies, competition
supply)
6) Privatisation (vs. nationalisation)
Education and training
● This will improve FOP - labour
● More skilled workers → ↑ overall productive capacity within a country
● Skilled workers are needed to adapt to new production methods + new
technologies
● Government can:
○ Fund private sectors to have their own training programme
○ Fund universities by allowing more students to enrol
Labour market reforms
● By changing the labour market to be more flexible, it can help employers to hire
more efficient workers
● This is done by:
1) Reducing the power of the trade unions
2) Reducing unemployment benefits
3) Minimum wage laws
Selective tax incentives
● Tax cuts targeting different groups of workers can encourage them to ↑
productivity and expand productive potentials
● This can be done by:
