- Supply-side policy
- Supply-side policy is government action to raise potential GDP by increasing the quantity or productivity of the economy's labour, capital and technology.
- Demand-side policy
- Demand-side policy is fiscal or monetary policy used to shift aggregate demand so that output moves towards potential GDP.
Types of supply-side policy
Can you name the two types of supply-side policy?
The two differ in who decides how the extra resources are used.
A market-based supply-side policy changes incentives, by cutting taxes, regulation or benefits, and leaves firms and workers to decide how resources are used.
Can you think of an example?
Lower taxes on income and profits make work and investment pay more. Fewer rules on hiring and starting a business stop deterring firms. Less generous benefits raise the cost of staying unemployed.
An interventionist supply-side policy has the government choose and pay for investment itself, in physical capital, human capital or technology.
Can you think of an example?
The state builds roads, railways and power supply; pays for schools, apprenticeships and job training; and funds research in government laboratories and grants to universities.