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Economics Unit 2 Edexcel - Managing the UK economy Tuesday 19th May 2015 (PM)

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AJC1997

here's a list of supply/demand side policies, I'm probably missing quite a few so feel free to add them:

Supply side:
Increase in government expenditure on education and training schemes
Increase in government expenditure on healthcare
Privatisation
Deregulation
Reduction in Income Tax
Reduction in the power of Trades Unions
Reducing state welfare benefits
Improving transport and infrastructure
Reduction in corporation tax

Demand side:
Fiscal Policy - Expansionary fiscal policy involves increasing government expenditure and lowering tax rates as both of these will increase aggregate demand, Contractionary is the opposite and will be deployed during a period of high inflationary pressure.

Monetary policy - Involves manipulation of the money supply, Interest rates and the exchange rate. Expansionary monetary policy involves decreasing interest rates - this makes it cheaper for firms to take out loans and therefore to invest in new capital, it also makes mortgages more affordable thus increasing disposable income and consumer spending, the biggest component of aggregate demand (66%).

As for the exchange rate - an appreciation of the pound (increase in demand/decrease in supply for the sterling) will worsen the current account deficit as it becomes cheaper to buy imports and UK exports become less competitive due to the higher price. A depreciation will do the opposite - the UK has a high marginal propensity to import, especially for factors of input such as oil.

Any key demand/supply side policies I'm missing? Also if you have questions on how to evaluate these let me know

Reply 141

Mr.Samba

If there was a question on increasing employment without causing inflation could supply side policies not be used? It's a bit confusing as the output ago could grow.

Things such as education (more skills) and fewer employment regulations?

Reply 142

chemistryislove

Original post by Mowtoe

That is a really tricky one

Change in source of raw materials - provide cheaper alternatives so more materials can be bought for same budget this causing vertical part LRAS to shift as a result of increase in productive capacity.

Increase in international trade - (I presume you're referring to imports) imports are often a factor of production in many sectors, if imports are cheaper, costs of production are lowered and more can be bought leading to a shift in LRAS curve to right.

Absence or inefficiencies of capital markets is a constraint on economic growth as businesses are unable to gain funding via loans to reinvest and thus increase productive potential. This often happens in less economically developed countries where there are high interest rates on borrowing and corruption.

Reply 143

AJC1997

Original post by Mr.Samba

I'm not sure, but I'd think supply side policies could be used. Supply side policies by themselves are unlikely to cause inflation unless the level of aggregate demand in the economy is at the same level/higher than the increase in supply? I hope a nice simple 30 marker comes up :P

Reply 144

Emmak26

Original post by chemistryislove

Thank you sooo much!

Reply 145

Emmak26

Btw how many different conflicts between objectives do you think we need to learn? like in my book theres
inflation and employment
economic growth and BOP
increased employment and sustainable environment
economic growth and income redistribution
inflation and equilibrium on the BOP

Reply 146

Rubberduckiller

how does investment increase ad in economy and can u also say it increase as in the long run

Reply 147

badaman

Is Healthcare improvements a supply side policy?

Reply 148

falloutboyyy

Simple as Invest being a component of AD

And yep in long run it increases AS

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Reply 149

badaman

Original post by Rubberduckiller

how does investment increase ad in economy and can u also say it increase as in the long run

Investment is a component of AD

Reply 150

falloutboyyy

Yes as long as you explain it well.

But stick to the main ones?

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Reply 151

falloutboyyy

Hiw to eval the supply sides like privatisation deregulation etc x

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Reply 152

badaman

What are all of the conflicts between macroeconomic objectives + explain them? Thanksss

Reply 153

AJC1997

Original post by Rubberduckiller

how does investment increase ad in economy and can u also say it increase as in the long run

AD = C+I+G+(X-M)

I= investment in capital

an increase in investment is likely to only have a big impact in the long run because it takes time to invest in new capital for example and to be able to utilise it to increase output.

The investment will mean that firms become more efficient and their level of output and productive capacity increases, as a result, goods will be available at lower prices thus increasing consumer spending, the biggest and most important component of aggregate demand.
Correct me if I'm wrong

Reply 154

AJC1997

Original post by badaman

Is Healthcare improvements a supply side policy?

Yes government expenditure on Healthcare is a supply side policy. It means that the labour force will become more efficient and have less days off work. However there's a time lag issue involved with government investment/spending on healthcare and also an opportunity cost. Also it will worsen the governments budget deficit in the short run

Reply 155

Rubberduckiller

Original post by AJC1997

yh bt increasing output isnt that linked to supply side while incestment is a component in AD

Reply 156

Rubberduckiller

Original post by badaman

Investment is a component of AD

Bt then if investment increases output in the long run isnt it also linked to supply side

Reply 157

AJC1997

Original post by falloutboyyy

Hiw to eval the supply sides like privatisation deregulation etc x

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Privatisation: There is no guarantee that selling public assets to the private sector will increase efficiency and output, they may spread the decrease in costs/increase in revenue across their share holders.

It could also lead to private monopoly power - in which they charge high prices and exploit their consumers, a public monopoly wouldn't be able to exploit it's consumers in the same way.

there is an opportunity cost and risk of government failure if they make bad decisions on which firms to privatise.

•

It depends on the industry in question. An industry like telecoms is a typical industry where the incentive of profit can help increase efficiency. However, if you apply it to industries like health care or public transport the profit motive is less important.

•

It depends on the quality of regulation. Do regulators make the privatised firms meet certain standards of service and keep prices low.

•

Is the market contestable and competitive? Creating a private monopoly may harm consumer interests, but if the market is highly competitive, there is greater scope for efficiency savings.

Deregulation:

It depends on the situation and confidence of the economy and other components of aggregate demand. For example deregulation involves reducing barriers of entry, but unless there is a high level of demand then firms may not be inclined to start up/ join the market in question, also existing companies can take advantage of economies of scale and hence have lower production costs than new firms, so it may still be difficult for new firms to enter.

These things aren't the easiest to evaluate imo but I think most of what I said should be correct

Reply 158

IDK Tuition

Original post by Emmak26

Hi Emmak,

You shouldn't really need to memorise specifics- most of these can be inferred from the AD-AS graph e.g if AD shifts to the right, then real GDP goes up and unemployment goes down. Inflation will also go up, depending on which section of the AS curve we're at.

Tom (IDK-tuition.com, free online economics videos and resources)