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IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses

A government builds a new freight corridor linking Indian ports to inland manufacturing clusters. Which is the most direct supply-side effect on firms in those clusters?

The freight corridor lowers transport and logistics costs for firms, which raises productive efficiency and shifts long-run aggregate supply outward. It is an interventionist supply-side measure because the state provides infrastructure that private markets may under-supply, rather than operating through demand, money or tax channels.

  1. AA rise in the marginal propensity to consume of households
  2. BA fall in firms' transport and logistics costs, shifting long-run aggregate supply outwardCorrect
  3. CA rise in the exchange rate that makes imports cheaper
  4. DAn increase in the money supply that lowers interest rates
  5. A fall in the natural rate of unemployment because of lower income tax

Explanation

Infrastructure investment lowers firms' costs and raises productive capacity, shifting long-run aggregate supply to the right. The other options describe demand-side, monetary or tax effects that do not follow directly from a freight corridor.

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