Supply-side policies Paper 1

IBDP Economics  SL  – Macroeconomics- Supply-side policies Paper 1- Exam Style Practice Questions

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Supply-side policies Paper 1

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Exam Style Question for Macroeconomics-Supply-side policies Paper 1

Question

Explain how increased investment by the government in education and training can affect both aggregate demand and aggregate supply.

▶️Answer/Explanation

Answers may include:

  • definition of investment, aggregate demand, aggregate supply
  • diagrams to show aggregate demand (AD) shifting right and LRAS shifting right
  • explanation of how increased investment by the government in education and training can increase AD in the short term by increasing the G component of C+I+G+X-M and increase LRAS in the long term as labour productivity increases
  • examples of countries in which the government has increased investment in education and training.

Question

Evaluate the view that inflationary pressures in an economy are best reduced using supply-side policies.

▶️Answer/Explanation

Answers may include:

  • definition of inflation, inflationary pressures, supply-side policies
  • diagram to show the impact of supply-side policies on inflation via the shift of long-run aggregate supply (LRAS) to the right
  • explanation of how market based (eg deregulation, anti-monopoly policy, etc) and/or interventionist supply-side policies (eg price controls, subsidies, etc) may reduce inflationary pressures in an economy
  • examples of situations where supply-side policies have helped to reduce inflationary pressures
  • synthesis and evaluation.

Question

Evaluate the effectiveness of interventionist supply-side policies in reducing the level of unemployment in an economy.

▶️Answer/Explanation

Answers may include:

  • definitions of unemployment, interventionist supply-side policies
  • diagram showing LRAS shifting right and/or supply of labour increasing in a labour market diagram; candidates may also show AD shifting right as a short-term effect of supply-side policies
  • explanation that interventionist supply-side policies increase the quantity and quality of factors of production and thus increase the productive capacity of the economy and can be targeted at particular sectors of the economy; this may help to reduce structural unemployment in the long term and also contribute to the reduction of demand-deficient unemployment in the short term through the impact on AD
  • examples of interventionist supply-side policies helping to reduce unemployment in practice 
  • synthesis or evaluation.

Question

Explain how the use of supply-side policies might encourage greater domestic competition and improve the international competitiveness of a country.

▶️Answer/Explanation

Answers may include:

  • Terminology: supply-side policies, international competitiveness, competition
  • Explanation: of how the use of market-based supply-side policies such as privatization, deregulation, trade liberalization and anti-monopoly legislation and interventionist supply-side policies such as government spending on education and training, R&D and infrastructure might encourage greater competition; an explanation that international competitiveness may be improved as a result of the LRAS increasing and lowering the rate of inflation/the price level, hence making exports relatively cheaper
  • Diagram: an AD/AS diagram showing a rightward shift of LRAS.

Question

Using real-world examples, evaluate the view that the use of interventionist supply-side policies is the most effective way of reducing a country’s rate of unemployment.

▶️Answer/Explanation

Answers may include:

  • Terminology: interventionist supply-side policies, unemployment
  • Explanation: of the view in terms of the successful implementation of interventionist supply-side policies increasing the productive capacity of the economy, increasing the demand for labour in the long run and thus lowering the level of unemployment; such policies are also likely to increase AD
  • Diagram: an AD/AS diagram to show LRAS being shifted to the right and/or AD shifting right
  • Synthesis (evaluate): the supply-side policy applied depends on the type of unemployment, the limitations of using interventionist supply-side policy in reducing unemployment; interventionist policies compared with market-based supply-side policies; the potential benefits of alternative policies such as monetary and fiscal policies; consideration of “most effective”; overall assessment
  • Examples: real-world examples of where governments have attempted to reduce unemployment using interventionist supply-side policies and/or other policies.
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