IAI Actuarial Core Principles · Business Economics · Supply-side policies and their impact on businesses
A government wants to improve the economy's long-run growth without adding to inflationary pressure. Which pair of supply-side objectives would best support this aim?
Higher labour productivity and lower structural unemployment best support non-inflationary growth because they raise potential output and shift long-run aggregate supply outward. The other options mostly boost demand, raise costs or restrict trade, which may add to inflation or reduce efficiency rather than expand capacity.
- AHigher labour productivity and lower structural unemploymentCorrect
- BA higher money supply and lower reserve requirements
- CLarger government spending and lower direct taxes on consumers only
- DHigher import duties and a weaker currency
- Higher minimum wages and tighter rules on hiring
Explanation
Higher productivity and lower structural unemployment raise potential output, so growth occurs without a rise in the price level. Money supply expansion and extra government spending mainly lift demand and risk inflation. Higher minimum wages and hiring rules tend to raise firms' costs and reduce employment.
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