Macroeconomics

‭A‬ ‭supply-side‬ ‭policy‬ ‭allows‬ ‭aggregate‬ ‭supply‬ ‭to‬ ‭increase‬ ‭(SRAS₁‬ ‭to‬ ‭SRAS₂),‬ ‭hence‬ ‭reducing‬ ‭the‬ ‭price‬ ‭level (PL₁ to PL₂) and increasing real output (Y₁ to Y₂).‬

‭With‬‭time,‬‭aggregate‬‭demand‬‭will‬‭increase‬‭too.‬‭If‬‭the‬‭increase‬‭in‬‭aggregate‬‭supply‬‭can‬‭keep‬‭up‬‭with‬‭this‬ ‭increase‬ ‭in‬ ‭aggregate‬ ‭demand,‬ ‭the‬ ‭country‬ ‭can‬ ‭enjoy‬ ‭a‬ ‭higher‬ ‭real‬ ‭GDP‬ ‭without‬ ‭experiencing‬ ‭demand-pull inflation.‬ ‭In‬ ‭addition,‬ ‭supply-side‬ ‭policy‬ ‭can‬ ‭be‬ ‭used‬ ‭to‬ ‭solve‬ ‭cost-push‬ ‭inflation.‬ ‭By‬ ‭increasing‬ ‭spending‬ ‭on‬ ‭training,‬ ‭labor‬ ‭productivity‬ ‭increases,‬ ‭hence‬ ‭reducing‬ ‭labor‬ ‭cost‬ ‭for‬ ‭frms.‬ ‭This‬ ‭aids‬ ‭in‬ ‭reducing‬ ‭producers’ production costs.‬ ‭In‬ ‭the‬ ‭long‬ ‭run,‬ ‭an‬ ‭increase‬ ‭in‬ ‭the‬ ‭productivity‬ ‭of‬ ‭factors‬ ‭of‬ ‭production‬ ‭as‬ ‭a‬ ‭result‬ ‭of‬ ‭implementing‬ ‭supply-side‬ ‭policy‬ ‭implies‬ ‭an‬ ‭increase‬ ‭in‬ ‭the‬ ‭economy’s‬ ‭productive‬ ‭capacity.‬ ‭This‬ ‭is‬ ‭reflected‬ ‭by‬ ‭an‬ ‭outward shift of the LRAS (LRAS₁ to LRAS₂) which indicates economic growth.‬

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