Edexcel AS Economics (New Spec) Unit 2 - 23rd May 2016

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If the power of trade unions is reduced, workers have less ability to bargain for higher wages

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This means that firms do not have to pay as higher wages

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Wages are a cost of production

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If cost of production falls, AS increases

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ALSO: if power of trade unions is reduced, less working days are lost through strike action (you may remember the recent sixth form college strike: did you get a day off? Your day off meant that you were not learning, and so were not contributing to the output of the economy - Yes, I know quite far fetched - but in the 1970s, a significant number of days were lost which had a significant impact on the producitivity of the economy)

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If less working days are lost, then productivity and output of the economy increases, therfore increasing AS

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Therefore, reducing trade union power has increased AS and has been effective as a supply side policy.

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It may be evaluated that reducing power of trade unions is difficult nowadays, because much of the work was done in the 1980s (Maggie Thatcher). There is only so much reduction in trade union power that can be achieved

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Also, if trade unions are abolished, working conditions may worsen. This may cause workers to protest in other ways e.g not working hard. Therefore there may be unintended effects which actually worsen productivity, and cause AS to shift left.

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It can also be evaluated that other policies may be conflicting i.e reducing trade union power means that living standards fall, may worsen income distribution too

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Fiscal Policy: Even if interest rates are low, but government taxation is high, consumption & investment are unlikely to rise significantly. Therefore the low interest rates may not stimulate inflation.

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Evaluation: however, it can be said that taxes may affect AS more soc than than AD as it affects production costs (despite being demand side).

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Consumer and Firms' Confidence: depending on the state of the economy, confidence can be affected. For example in the 2008 crisis, monetary policy through interest rates was largely ineffective due to low confidence (leading to the introduction of QE). If consumer confidence is low, they are unlikely to consume, despite low interest rates. In this case the inflation target may not be achieved. Similar point can be made with regard to firms' investment.

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Evaluation: Although consumer and firms' confidence may influence the MPC's inflation target, this is only likely during a largescale economic down turn. In fact, interest rates are an important factor which actually affects confidence.

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Long Run vs Short Run: It is suggested that monetary policy takes 12-18 months to take effect (See Mark Carney's May 2016 open letter to Mr Osbourne page 4). Therefore timing lags would affect the MPC decision and effectiveness of monetary policy in the short run.

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Base rates may not correspond to lower interest rates for consumers and firms: Even if the Bank of England sets a low base rate, making it cheaper for High Street Banks to borrow, these High Street Banks may not reduce their own interest rates. This may be because they are recovering their own financial health, so are not willing lower their interest rates. In this instance, low base rate would not stimulate AD, and inflation target of 2% (+/- 1).