Supply-Side Policies chapter 35


  • Labour.
  • Physical capital or human capital.
  • The availability of natural resources.
  • Technology.
  • Expectations of   the price level.
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The Shape of the New Keynesian Short-Run Aggregate

  • almost horizontal at low levels of national income
  • gradually steepens as bottlenecks or shortages occur.
  • vertical as it approaches full employment. 
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The Aggregate Supply Curve and Production Bottlene

 trade off between  increase in national income / price rises depends on how large the output gap is. If AD continues to shift to the right = means that national income  only rise by  small amounts but the pressure on resources will cause the price level to rise more quickly.

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The Aggregate Supply Curve and Production Bottlene

output gap wrong=to unanticipated consequences.

  • Rising prices little growth
  • Large fall in national income little impact inflation levels 


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Sustained Economic Growth

Shifting the aggregate supply to the right can = sustained growth. 

  •    Increases living standards
  •   Reduces unemployment
  •    Keeps prices stable
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Market-orientated supply-side policies

Interventionist supply-side policies 

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Market Orientated Supply-Side Policies

There are four elements 

A.Reform tax and welfare policy.

B.Flexible labour markets.

C.Reducing government spending.

D. Privatization and deregulation

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The Laffer Curve and Supply-Side Economics

The Laffer curve looks at the relationship between tax rates and tax revenue.

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Flexible Labour Markets

Three aspects to getting more flexible labour markets

  • Reduce trade union power and encourage local level wage agreements.
  • Reduce rigidities in the labour  market
  • Improving market information for employers, workers and the unemployed.  
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Interventionist Supply-Side Policies

Four key aspects to interventionist supply-Side policies.

  •     Infrastructure Investment.
  •     Investment in Education and Training
  •      Research and Development 
  •     Regional or Industrial Policies
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