In the Long Run, the Country's Economy Can Only Be Improved Through Supply Side Policies

Topics: Inflation, Monetary policy, Economics Pages: 5 (838 words) Published: July 29, 2013
In the long run a country’s economic performance can only be improved through the implementation of supply side policies (incomplete)

The economic performance of a country is determined by a country’s efficiency in managing its macroeconomic objectives. An economy with high level of performance should have low interest rates and unemployment, equity of income distribution, balance of payments and a projected economic growth. When an economy has fulfilled these objectives, it will function at optimum efficiency. In order to attain or equilibrate an efficient economy, supply side and demand side policies can be used.

Supply side policies are those policies that affect the aggregate supply of the economy. The aggregate supply the They are implemented in order to increase the amount of 'supply' that is capable of being produced over the long term. They improve the productive potential of the economy.

Supply side policies are generally categorized into two classifications: market oriented supply side policies and interventionist policies. Market oriented policies (unlike interventionist) operate with minimal governmental interference. They are designed to increase incentives for labor; hence, the productivity of the economy. These policies include privatization, deregulation, reduction in corporate and household income taxes and various labor market reforms.

Interventionist policies, on the other hand, encourage the government to play a fundamental role for contributing towards economic growth. They are designed to improve the quality and quantity of labor. Policies include legislations against trade unions, research and development, education and training, unemployment benefits, provision of infrastructure and support.

Like supply side policies, demand side policies play an active and substantial contribution to an economy. To stimulate economic growth the government uses expansionary demand side policies. Expansionary demand side policies can manifest through fiscal and monetary policies. Fiscal policies involve themselves with government expenditure and taxation. Hence if the government aims to stimulate economic growth, he would try to encourage consumption and investment through reduction of taxes. By doing so, consumers gain more disposable income. Hence through stimulated consumption, the aggregate demand of the economy increases. Furthermore, through reduction of corporate taxes, investment should increase as firms gain more after-tax profits: hence increasing the aggregate demand. Governments could also expend more to improve or increase public services. Through using expansionary fiscal policy, the government can control the level of demand deficient unemployment.

Diagram 1:

Price Level
Price Level

SRAS
SRAS

P2@
P2@

P1
P1

AD2
AD2

AD1
AD1

Q2
Q2
Q1
Q1
GDP
GDP

As you can see in this diagram, through increasing the consumption, interest rates and government expenditure, the aggregate demand should shift towards the right hand side. Hence there will be an economic growth. However, by increasing the aggregate demand, there will be an increased price level in the economy hence causing a demand-pull inflation. Furthermore, due to more money in the economy, an inequity of income distribution will be produced.

Monetary policy involves itself with the supply of money and interest levels in the economy. With expansionary monetary policy, the central bank causes changes in the base rate, decreases interest rates. By doing so, consumers are discouraged to save, increasing the consumption and therefore the aggregate demand. Due to the low costs of borrowing, there is also an increase in investment mainly due to companies seeking to expand. Due to high level of aggregate demand, the government can control the level of unemployment. Furthermore, due to a reduced interest rate, foreign nations will look to purchase your products. This will cause an increase in exports, hence...
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