What this lesson teaches
I can explain fiscal, monetary and supply-side policy and judge how well each works.
Syllabus 9570, 3.2.3(b). Macroeconomic Policies: Policy measures and their effectiveness in achieving macroeconomic objectives:; Fiscal policy - How discretionary fiscal policy can influence the level of economic activities and living standards through government spending and taxation; Monetary policy - How monetary policy can influence the level of economic activities and living standards through the management of exchange rates (case of Singapore) and interest rates; Supply-side policies - How supply-side policies can improve quantity, quality and mobility of factors of production to increase the productive capacity of an economy and hence affect living standards
Make a guess
A sudden recession hits. Can supply-side policies pull the economy out quickly?
- Yes. They raise output straight away.
- No. They take years to raise capacity.
- Yes, because they increase AD.
Show the answer
No. They take years to raise capacity.
Training and infrastructure take a long time to work. In a sudden recession the problem is weak demand, which they do not fix quickly.
Supply-side policies tackle the root causes of low growth, but they are slow, costly and uncertain.
Supply-side policies address long-run problems: slow productivity growth, skills mismatches and limited capacity.
But they take time. Training takes months or years, and infrastructure takes years to build.
They cost public money, and results are uncertain: workers may not complete courses, and firms may not use new technology well.
They work best when there is demand for the extra output. New machines are of little use if orders are weak or staff lack the skills to use them.
- Strength
- Tackles root causes; growth without inflation.
- Limits
- Slow, costly, uncertain.
Worked example: New machines left unused
A tax incentive encourages firms to buy new technology. Some machines sit unused, because staff lack the skills and demand is weak.
- The policy raised investment, but not productivity.
- Without trained staff, the machines add little capacity.
- Without demand, firms have no reason to use them fully.
- Pairing technology grants with training would work better.
Watch out for this
High enrolment in training shows the policy is working.
What matters is whether workers gain skills and move into better jobs, not how many sign up.
Check your understanding
Training grants are offered, but few workers sign up because courses clash with their shifts. What does this show about supply-side policy?
- Its success depends on how firms and workers respond to it.
- It works best when demand is weak, as in a sudden recession.
- It raises AD too quickly, so prices rise before output can.
Show the answer
Its success depends on how firms and workers respond to it.
Right. Capacity grows only if people take up the training. Design and take-up decide how well it works.