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

A government pursues a large programme of state-funded infrastructure and training to shift long-run aggregate supply to the right. Which of the following is the most accurate assessment of its likely limitations?

The main limitations are long time lags before benefits appear, the opportunity cost of funding through taxes or borrowing which may crowd out private investment, and the risk of poor targeting or government failure. The claims of no cost, instant effect or lower potential output are incorrect.

  1. ABenefits may arrive only after long time lags, financing may crowd out private investment or raise taxes, and spending may be poorly targetedCorrect
  2. BThe policy always lowers potential output because public spending reduces labour supply
  3. CThe policy has no cost because the state can fund it without borrowing or taxation
  4. DThe policy increases short-run aggregate supply only and cannot affect the long run
  5. The policy works instantly, so lags are not a concern

Explanation

Interventionist policies are costly and slow: the returns from infrastructure and education take years to appear. Funding by borrowing or taxation can crowd out private investment or reduce incentives, and officials may allocate money badly. It is wrong to say the policy has no cost or that it works instantly.

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