Supply-side policy
Supply-side policy
- Supply-side policy raises the economy's productive capacity — shifting LRAS right by making markets work better and raising productivity.
Practice
Supply-side policy aims to:
Supply-side policy increases capacity and productivity, shifting LRAS right.
Two kinds
- Market-based (let markets work freely):
- cut income tax/benefits to strengthen the incentive to work,
- privatisation (sell state firms to private owners),
- deregulation (remove rules that block competition).
- Interventionist (government acts directly):
- spend on education/training (skills),
- infrastructure (roads, ports, broadband),
- support research and technology.
Practice
Classify each supply-side policy.
Market-based policies free up markets; interventionist policies use direct government action.
Effectiveness
- Powerful: can raise growth and lower inflation with no trade-off.
- But slow (education takes years), costly, and some measures (cutting benefits) widen inequality.
Practice
A key advantage of supply-side policy is that it can raise growth AND lower inflation at the same time.
By raising capacity it can deliver growth with lower inflation — no trade-off — but it is slow and costly.
You've got it
Key idea
- supply-side policy shifts LRAS right (more capacity, higher productivity)
- market-based (tax cuts, privatisation, deregulation) vs interventionist (education, infrastructure)
- it can give growth + lower inflation with no trade-off, but it is slow