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

A government decides to raise spending on public training institutes, roads and research laboratories in order to lift the long-run productive capacity of the economy. Which description best classifies this policy?

This is an interventionist supply-side policy. The government directly funds training, roads and research to improve the quantity and quality of inputs and raise long-run productive capacity. Market-based policies work through incentives and deregulation instead, while demand management and monetary policy target short-run spending and borrowing costs.

  1. AAn interventionist supply-side policy, because the state directly improves the quantity and quality of factor inputsCorrect
  2. BA market-based supply-side policy, because it relies on lower marginal tax rates to raise incentives
  3. CA demand-management policy, because its only effect is to shift aggregate demand
  4. DA monetary policy, because it changes the cost of borrowing for firms
  5. An exchange rate policy, because it fixes the external value of the currency

Explanation

Interventionist supply-side policies involve direct state action, such as funding education, training, infrastructure and R&D, to raise potential output. Market-based policies instead rely on removing barriers and strengthening incentives, for example through tax cuts or deregulation. Spending on capacity does have demand effects, but its main aim is to shift long-run aggregate supply.

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