The Effectiveness of Supply-Side Policies (DP IB Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Demand-side Effects of Supply-side Policies
Supply side policies aim to increase the long-run aggregate supply
These policies often take years to complete, but once completed, they add extra productive potential to the economy
Examples of these kinds of policies include building new roads, new airports, new ports, new hospitals, new schools, new hydroelectric dams etc.
These types of supply-side policies require government spending on an annual basis for as long as it takes to complete the project
This government spending is a component of aggregate demand and helps to boost the national output in that year
E.g. to build a new port, the government has to hire a firm to complete the project, pay their workers, and pay for the materials (cement, sand, trucks, steel etc)
This government spending boosts aggregate demand in the short term
It has been argued that the best government spending is that which boosts AD in the short term but increases LRAS in the long term
Supply-side Effects of Fiscal Policies
Many fiscal policies have the ability to improve the productive potential (supply-side) of an economy
E.g. Education subsidies to help the poorest households constitute an annual expenditure for the government. However, in the long term they help to improve human capital which boosts productivity and output
The fiscal policy is short term (annually) however the supply-side impact occurs in the long term
An Evaluation of Supply-side Policy
The benefits of supply-side policies far outweigh the negatives, yet many economies fail to fully develop their supply-side policies due to a process of constant political change - and an associated change in government priorities
An Evaluation of Market Based Supply-side Policies
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An Evaluation of Interventionist Supply-side Policies
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