Supply Side Polices and Inflation

Topics: Inflation, Macroeconomics, Economics Pages: 4 (1486 words) Published: March 11, 2013
Evaluate the importance of supply side policies in helping control inflation in the U.K

Inflation is the general increase in the price level and results in the value of money falling. The government sets a target rate of inflation of 2%, measured by the consumer price index within a band 1% above and 1% below the target. Currently inflation is 2.6% and is inside the target rate even though the U.K economy is in a recession. Even though the monetary policy is used by the Bank of England to control inflation, supply side policies could be used to help improve the productive capacity of the economy and shift the long run aggregate supply curve to the left, to bring prices down. There are two main causes of inflation; demand-pull and cost-push inflation. Demand-pull inflation is when demand for goods and services exceeds supply and cost push inflation is when a firm experiences an increase in prices in order to maintain profit after experiencing a rise in costs. As stated in extract F supply side policies seek to increase the productive capacity of the economy in the long run and raise the trend rate of growth of labour and capital productivity. A number of supply-side policies have been introduced into the U.K economy in recent years such as financial support for education and training. Education and training can help raise the skills in the workforce and improve employment prospects by creating a more productive workforce and reduces the average costs. It also helps improve the occupational mobility of labour. This could boost exports due to the increased productivity, which will reduce the balance of payments deficit on current account which is another important macroeconomic objective. However financing this policy is expensive and creates an opportunity cost where the money could have been spent on something else, such as healthcare. Also exports will only be increased with the rise in productivity if the quality of the goods and services produced are better...
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