ECON 1951 EXAM SCRIPT FINAL PAPER
2026 EXAM Q&A STUDY GUIDE
◉ What are supply-siders?
Answer: Economists believing the strength of economic incentives in
considerable.
◉ What are examples of demand shocks? Supply shocks?
Answer: Demand shocks - Interest rates, inflation expectations, fiscal
policies
Supply schocks - Changes in production costs, technology
◉ Why is the AS/AD model better than the Keynesian model? (2)
Answer: AS/AD incoporates variable price changes, adds effects of
supply shocks.
◉ What is the greatest attribute of supply side policies compared to
fiscal or monetary policies? What do supply siders think supply side
policies can fight as a result?
Answer: Shifting AS to the right increases output but decreases
price.
Stagflation.
,◉ What are limitations of supply side policies compared to fiscal or
monetary policies? (2)
Answer: Shifting AS to the left increases output but also increases
prices.
Shifts in AS take a lot of time. People want change fast, but not going
to happen with supply side.
◉ What is the most distinguishing characteristic of supply-side
economics?
Answer: Importance placed on economic incentives
Ex: Rise in tax affects work/leisure decision, consumption/saving,
investment, market/nonmarket activity etc.
◉ In what three ways do supply-siders force economists to rethink
their advocacy of traditional policies?
Answer: 1. When economy hits supply shock, traditional remiedies
may not be appropriate.
Ex: Rising oil price increases price and output, gov intervention may
just raise price.
2. Traditional demand-side policies can have substantial impacts on
the supply-side
Ex: Higher tax to fight inflation shifts AD leftward, but shifts AS
leftward as well by raising costs and reducing incentives -
compounding effect on income and making price level uncertain
,3. Previously neglected options being considered Ex: Deregulation,
lower interest rates, higher wages for public sector for acting as
standard for the private sector.
◉ What does the Laffer Curve show? What does this relationship
look like?
Answer: Shows how the tax rate affects tax revenue/receipts.
Increasing tax initially raises tax revenue, but tax revenue then goes
down because of disincentive effects (work underground instead,
work less). Reagan thought tax cuts would bring receipts back up.
◉ Why do economists not share the same enthusiasm as supply-
siders with their policies? (4)
Answer: 1. Empirical magnitude has shown to be small
2. Many supply-side policies (ex: changing tax rate) have small effect
on AS but large effect on AD
3. Supply-side tax cuts have raised budget deficit and debt
substantially
4. Policies such as lowering import tariffs and reducing taxes on the
rich seem politically unacceptable
◉ What are the five main sources of GDP growth? What are
examples of supply side policies for each?
Answer: 1. An increase in the size of the labor force
, SSP: Immigration regulations, day-care subsidies, retirement
benefits, tax benefits
2. An increase in the quality of the labor force
Ex: Retraining programs, development of technical schools
3. An increase in the size of the stock of physical capital
Ex: Tax incentives for investment and saving
4. An increase in the quality of the capital stock
Ex: Tax incentives for R & D, promotion of competition
5. Improvements in the way in which capital and labor are combined
to produce output
◉ What does growth in productivity entail? (3) How is it measured?
Answer: 1. Increases in physical capital
2. Higher quality of labor and capital
3. Improvements in how labor and capital are combined
Output per hour.
◉ What slowed down productivity from early 1970s to mid 1990s?
(6)
Answer: 1. Return to normal (WW2)
2. Decreases in investment (Lower growth in capital, less R&D, less
infastructure)
3. Measurement problems (Regulations, quality vs. quanitity etc.)
2026 EXAM Q&A STUDY GUIDE
◉ What are supply-siders?
Answer: Economists believing the strength of economic incentives in
considerable.
◉ What are examples of demand shocks? Supply shocks?
Answer: Demand shocks - Interest rates, inflation expectations, fiscal
policies
Supply schocks - Changes in production costs, technology
◉ Why is the AS/AD model better than the Keynesian model? (2)
Answer: AS/AD incoporates variable price changes, adds effects of
supply shocks.
◉ What is the greatest attribute of supply side policies compared to
fiscal or monetary policies? What do supply siders think supply side
policies can fight as a result?
Answer: Shifting AS to the right increases output but decreases
price.
Stagflation.
,◉ What are limitations of supply side policies compared to fiscal or
monetary policies? (2)
Answer: Shifting AS to the left increases output but also increases
prices.
Shifts in AS take a lot of time. People want change fast, but not going
to happen with supply side.
◉ What is the most distinguishing characteristic of supply-side
economics?
Answer: Importance placed on economic incentives
Ex: Rise in tax affects work/leisure decision, consumption/saving,
investment, market/nonmarket activity etc.
◉ In what three ways do supply-siders force economists to rethink
their advocacy of traditional policies?
Answer: 1. When economy hits supply shock, traditional remiedies
may not be appropriate.
Ex: Rising oil price increases price and output, gov intervention may
just raise price.
2. Traditional demand-side policies can have substantial impacts on
the supply-side
Ex: Higher tax to fight inflation shifts AD leftward, but shifts AS
leftward as well by raising costs and reducing incentives -
compounding effect on income and making price level uncertain
,3. Previously neglected options being considered Ex: Deregulation,
lower interest rates, higher wages for public sector for acting as
standard for the private sector.
◉ What does the Laffer Curve show? What does this relationship
look like?
Answer: Shows how the tax rate affects tax revenue/receipts.
Increasing tax initially raises tax revenue, but tax revenue then goes
down because of disincentive effects (work underground instead,
work less). Reagan thought tax cuts would bring receipts back up.
◉ Why do economists not share the same enthusiasm as supply-
siders with their policies? (4)
Answer: 1. Empirical magnitude has shown to be small
2. Many supply-side policies (ex: changing tax rate) have small effect
on AS but large effect on AD
3. Supply-side tax cuts have raised budget deficit and debt
substantially
4. Policies such as lowering import tariffs and reducing taxes on the
rich seem politically unacceptable
◉ What are the five main sources of GDP growth? What are
examples of supply side policies for each?
Answer: 1. An increase in the size of the labor force
, SSP: Immigration regulations, day-care subsidies, retirement
benefits, tax benefits
2. An increase in the quality of the labor force
Ex: Retraining programs, development of technical schools
3. An increase in the size of the stock of physical capital
Ex: Tax incentives for investment and saving
4. An increase in the quality of the capital stock
Ex: Tax incentives for R & D, promotion of competition
5. Improvements in the way in which capital and labor are combined
to produce output
◉ What does growth in productivity entail? (3) How is it measured?
Answer: 1. Increases in physical capital
2. Higher quality of labor and capital
3. Improvements in how labor and capital are combined
Output per hour.
◉ What slowed down productivity from early 1970s to mid 1990s?
(6)
Answer: 1. Return to normal (WW2)
2. Decreases in investment (Lower growth in capital, less R&D, less
infastructure)
3. Measurement problems (Regulations, quality vs. quanitity etc.)
