• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Evaluate the use of supply side policies in raising the level of real output in an economy which is near to full employment

Extracts from this document...

Introduction

Question: Evaluate the use of supply side policies in raising the level of real output in an economy which is near to full employment. Answer A supply side policy is one which attempts to improve incentives and productivity in an economy (so increasing the productive potential of the economy) thereby shifting the LRAS to the right. An example of a supply side policy would be to lower certain taxes (for example high income tax leads to less people working and high corporation tax can reduce incentives of firms to make profits) to raise the LRAS. Improved education and training is another supply side policy as it raises the level of human capital, therefore resulting in a rise in LRAS. ...read more.

Middle

The increase in LRAS has a favourable effect on inflation as price level decreases. However, improved education and training involves an opportunity cost as the money could be spent elsewhere. Also, there is a time lag before the full effects are seen, and there is no guarantee that the improved training and education will even pay off. Cutting taxes means lower tax revenue for government so reduced spending. This might mean the government can afford to give less grants and subsidies to firms, which may have an adverse affect on the LRAS. Also, cutting taxes could lead to/worsen the budget deficit. ...read more.

Conclusion

or using an expansionary monetary policy (increasing quantitative easing and decreasing interest rates) will shift AD from AD1 to AD2. This is because consumption increases due to lower interest rates (easier to borrow money to finance credit purchases, lower interest rates on mortgages, lower taxes such as VAT), investment goes up (again easier to borrow money, lower taxes) and government spending goes up. The increase in AD results in an increase in the price level from Pl1 to PL2. However, the level of real output at full employment does not change, and stays at RO1, so using demand side policies at full employment will be purely inflationary. Therefore supply side policies are more effective as they do actually increase the level of real output, and have a favourable effect on inflation. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    Falling tourism and air travel in general effect inflation levels because they all contribute towards aggregate demand. However the real issue is that of oncoming recession, particularly in the United States where there was a real worry that the economy would fall into recession and then that would spread across the Atlantic into Europe.

  2. Australia's place in the global economy - "Explain the reasons for our current exchange ...

    Debility in economic growth meant that there was a decline in real GDP. Lower GDP meant lower productivity leading to a depreciation in $A, which is similar to the reflection of productivity and share prices in a firm. Less productivity meant that there was less demand for trade, reducing the demand for the $A 4.

  1. A report into supply side policies in the UK.

    Another policy that can be used is that of increasing the amount of money earned before taxes and making the taxation on the rest lower. This would increase supply as people would see it as an incentive to work as they would be better off with it, than for example living off of benefits.

  2. Evaluate using the multiplier, the likely effect on the UK price level an equilibrium ...

    The LRAS curve will shift to the left, further increasing the price level, but now decreasing real output; this cost push inflation will have an adverse effect, trapping the UK economy in a vicious cycle. This however, depends on the magnitude of the multiplier; in reality it may only be 1 or 2.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work