Macroeconomics
H. Supply-Side Efects and Policies Governmentscanalsoemploy supply-sidepolicies toachievemacroeconomicobjectives.Asthename implies,thesepoliciestargetthesupplysideratherthandemand.Thegoalofthesepoliciesistoprevent factors that reduce the productivity of the factors of production, consequently affecting aggregate supply. Study Tip When discussing supply-side policy, it’s always about trying to increase aggregate supply. No government will attempt to reduce aggregate supply. ● CutsinTaxes: Areductionintaxesaimstoincreaseincentives.Forinstance,acutincorporate taxes reduces production costs for suppliers, encouraging them to increase production and thereby boost supply. Similarly, a reduction inincometaxesincreaseshouseholds’disposable incomes,enablingthemtosavemore.Highersavingscontributetotheavailabilityofmorefunds and loans in an economy, which can be utilized for investment purposes. ● Increased Spending on Education and Training: When the labor force is well educated and trained, human capital improves leading to higher labor productivity. When labor is more productive, more units of output can be produced using less labor. This increases aggregate supply. ● InfrastructureDevelopment: Wheninfrastructureiseffcientandofhighquality(e.g.,effcient transport systems), suppliers can get their products to the markets quickly. In addition, less production interruptions related to infrastructureproblems(e.g.,poweroutages)reducefrms’ costs and losses. This is why governments fnance and provide infrastructure development projects. ● Investment in R&D and Technology: Technological improvements and breakthroughs allow capitaltoproducemoreoutputatalowercost.Thisiswhygovernmentsofteninvestinresearch and development and/or subsidize universities, researchcenters,andprivatefrmsinvolvedin technologicaldevelopment.Governmentsubsidies(paymentsmadetofrms)arewidelyusedto encourage producers to increase output. Othersupply-sidepolicytoolsmayincludereducinganyrestrictionsorregulationsthatmakesuppliers’ jobs harder, such as trade union reforms, privatization and deregulation, and so on. Study Tip Whenunsurewhetheraparticulartoolisafscalpolicyorasupply-sidepolicymeasure,askyourself what it targets. For instance, is thegovernmentaimingtoinfluenceaggregatedemandoraggregate supply with this tax cut? (AD = fscal policy; AS = supply-side policy). Tools of supply-side policy include the following:
166
© 2024 ACHIEVE ULTIMATE CREDIT-BY-EXAM GUIDE|MACROECONOMICS
Made with FlippingBook - Online Brochure Maker