Supply-Side Policies....

Hey Guys,

"How do Supply-Side Polices reduce inflation?"

Supply-Side Policies are designed to control/enhance economic growth and stop an economy overheating efficiently without a rise in inflation.
This can be achieved by productivity of firms increasing which ineffect increases output, which contributes towards AS and shifts it to the right while AD stays the same. This therefore can control inflation because if AD was to increase with a shift to the right, AS has already increased by a shift to the right which controls inflation by preventing demand-pull inflation.

Another way Supply-Side Policies stop inflation rising is through opening up barriers to trade and competition through business start-up loans,privatisation,deregulation of certain industries, this can cause firms to use given scarce resources in an efficient way and be less competitive giving consumers lower prices and not exploiting to them along with consumers being king by given a wide choice. This can stop demand-pull inflation again by there not being the presence of a Monopoly Firm which can control prices and give poor quality to consumers and no choice. When demand increases for the Monopoly Firm they can easily inflate prices to maximise profits causing exploitation. By opening up barriers to trade, competition this can be prevented to an extent and control prices at a fair level to consumers because of price competitiveness from other firms in the same sector. This ineffect reduce demand-pull inflation and controls cost-push inflation to some extent. Tough competition policy can prevent price-fixing cartels which try to inflate there prices to maximise profits. This can also shift AS to the right again causing more supply into an economy because of new firms entering the market.

A final way I am going to mention is a reduction in business tax, this can cause an overall higher revenue for firms which can be spent investment which can increase the productive capacity of an economy and if it is met then there will be a higher supply of goods/services in an economy causing AS to shift to the right again. This can cause an increase in exports but more importantly it can reduce prices of products to consumers by reductions in business tax passed onto consumers.

Supply-Side policies are great to increase AS in an economy and stop it overheating with the multiplier effect and cause a bubble! But Fiscal Policies are much more effective has inflation can be controlled through taxation and government spending but there is a huge time lag so it can be argued to an extent monetary policies are more effective seeming has they have monthly meetings and they are controlled by the MPC. They can control/stabalise inflation by controlling interest rates,exchange rates and the money supply in the circular flow of income.

Can someone please tell me if my answer is too long and areas where I can improve and things to add?

Thanks

Reply 1

goldsilvy

How many marks are for this question? Is this A-Level? And is that exact, in meaning of genuine, version of question?

Original post by I-&#9829

[...] this can cause firms to use given scarce resources in an efficient way and be less competitive giving consumers lower prices and not exploiting to them along with consumers [...]

Original post by I-&#9829

[...]A final way I am going to mention is a reduction in business tax [...]

corporation tax? As you mentioned profits.

Original post by I-&#9829

Supply-Side policies are great to increase AS in an economy and stop it overheating with the multiplier effect and cause a bubble!

This sentence is bit confusing. I reckon what you meant is that supply-side policies prevent forming of bubbles, though it is not so clear from your statement.

Original post by I-&#9829

[...]But Fiscal Policies are much more effective has inflation can be controlled through taxation and government spending but there is a huge time lag so it can be argued to an extent monetary policies are more effective seeming has they have monthly meetings and they are controlled by the MPC [...]

normative statement, when mentioning time lags, a comparison would be more appropriate. 'Huge' is not a very precise term. 'Considerably longer time lag of fiscal than monetary policies to fully sink into the economy' or so might be better.
Would be good to elaborate points in favour of monetary policies as well, e.g. they can respond to change in the economic situation quicker, are more flexible, than fiscal policies (at least once per month vs twice per year [Nov and April budget reports]. MPC is an independent body, set by government to control inflation and to enhance trust and confidence in the economy.

Original post by I-&#9829

They can control/stabalise inflation by controlling interest rates,exchange rates and the money supply in the circular flow of income

Isn't that controlled by government, e.g. quantitative easing?

Overall, fine piece of work, however I think you got sidetracked a bit. You should have focused only on supply-side policies and how they affect inflation. MPC and demand management is not really relevant. And bit more points to mention wouldn't do any harm, e.g. cutting unemployment benefits, reforming trade unions (free market approach) and/or education, training, investment grants, regional policy (interventionist approach). Mix of this and that and shall be fine.

Might have gibberish a bit, hope what I wrote makes sense. Some mistakes might happen, sorry in advance for them :smile:

Reply 2

HenryNunney

Write in chains of reason, then evaluate that chain of reason. The examiners love that!

ie. open barriers to entry > ↑in competitiveness in all firms > firms keep prices low in order to stay competitive > therefore I↓

However, it can be said that this would take a long time and monetary intervention would take place (example of demand-side control) over this time and so supply-side policies such as these only go so far in curbing inflation.

Hope this helps.

Reply 3