Demand-side Effects of Supply-side Policies
- Supply side policies aim to increase the long-run aggregate supply
- These policies often take years to complete, but once completed, they add extra productive potential to the economy
- Examples of these kinds of policies include building new roads, new airports, new ports, new hospitals, new schools, new hydroelectric dams etc.
- These types of supply-side policies require government spending on an annual basis for as long as it takes to complete the project
- This government spending is a component of aggregate demand and helps to boost the national output in that year
- E.g. to build a new port, the government has to hire a firm to complete the project, pay their workers, and pay for the materials (cement, sand, trucks, steel etc)
- This government spending boosts aggregate demand in the short term
- It has been argued that the best government spending is that which boosts AD in the short term but increases LRAS in the long term
Supply-side Effects of Fiscal Policies
- Many fiscal policies have the ability to improve the productive potential (supply-side) of an economy
- E.g. Education subsidies to help the poorest households constitute an annual expenditure for the government. However, in the long term they help to improve human capital which boosts productivity and output
- The fiscal policy is short term (annually) however the supply-side impact occurs in the long term
An Evaluation of Supply-side Policy
- The benefits of supply-side policies far outweigh the negatives, yet many economies fail to fully develop their supply-side policies due to a process of constant political change - and an associated change in government priorities
An Evaluation of Market Based Supply-side Policies
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An Evaluation of Interventionist Supply-side Policies
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