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Policy instruments
Supply-side Policies A range of policies aimed at enhancing the performance of an economy by strengthening market forces and increasing economic incentives Supply-side Policies in Labour Markets make labour market more competitive Education and training increase the number of those able to do work and improve the skills of those currently in work. Lower income tax Increase the incentive to work, more net-income. Lowering benefits gives those on benefits a higher incentive to work Reducing trade union power makes the labour force more competitive Supply-side Policies in the Product Market increase competition and efficiency in the market Privatisation this will increase or create competition within industries Deregulation this involves opening markets to greater competition. It invites more competitors which in turn drives down prices Free trade this will increase efficiency through the increase in competition and will keep costs low. Problems of Supply-side Policies (Evaluation points) They can be effective in the long run but take a long time to implement, with no immediate benefits (especially education- can be decades) Policies might also be morally incorrect and lead to a more unequal distribution of income (cutting benefits is harsh on those who are disabled) Demand-side Policies a range of policies designed to influence the level of aggregate Only work in the opinion of Supply-side economists i.e. a cut in income demand. tax might not lead some to work more. Fiscal policy Changes in public expenditure to influence level of AD.
Changing tax levels increasing tax = lower disposable income less AD, decreasing tax = more disposable income more AD Changing Government spending higher Gov. spending = more AD (by multiplier), lower Gov. spending = less AD ( by negative multiplier) Problems of Fiscal policy Fiscal policy takes a long time to implement (taxes have to wait until the annual budget, building a new hospital for example may take years). Also, the effect of fiscal policy is entirely dependant upon the multiplier effect, and also consumer and business confidence. Monetary policy Controlling money variables such as the rate of interest and the money supply, to influence Aggregate Demand. The rate of interest is inversely proportional to Aggregate demand (ceteris paribus) as interest rates go up, aggregate demand goes down. This is for a number of reasons. Consumer Durables Many consumers buy these on credit. When interest rates are high, repayments will be higher so less are purchased. Housing Market Houses are bought on a mortgage so when interest rates are high, repayments are also. Savings rates High interest rates increase the MPS it is more attractive to save, less attractive to spend.