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

A government reforms labour regulations to make hiring easier and reduces compliance procedures for firms. What is the most likely intended effect on businesses, in line with the objectives of supply-side policy?

The intended effect is lower costs and greater flexibility for firms, which encourages investment, hiring and expansion of output. This raises the economy's productive capacity and shifts aggregate supply outward, consistent with the core objective of supply-side policy.

  1. AHigher costs of production and a leftward shift of LRAS
  2. BLower costs and greater flexibility, encouraging investment and expansion of outputCorrect
  3. CA rise in aggregate demand through higher government spending
  4. DA fall in the labour force participation rate
  5. An increase in the cyclical budget deficit due to lower tax receipts only

Explanation

Easier hiring and fewer compliance procedures lower firms' costs and raise labour market flexibility. This encourages investment and output expansion, raising potential output. The measure is not a spending increase, so it does not work mainly via demand.

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