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

A government wants to raise the long-run growth rate without adding to inflationary pressure. Which pair of policies is most clearly supply-side in nature?

Funding vocational skills training and simplifying business licensing is the clearest supply-side pair. Both raise productivity and cut business costs, expanding potential output and long-run supply, so growth can rise without the inflationary pressure that demand-boosting measures would create.

  1. ARaising government spending on welfare and cutting the repo rate
  2. BFunding vocational skills training and simplifying business licensingCorrect
  3. CDevaluing the currency and increasing subsidies on exports of final goods
  4. DImposing price controls and raising the minimum support price
  5. Increasing consumer credit availability and reducing income tax on low earners to boost spending

Explanation

Skills training raises labour productivity and simpler licensing lowers business costs, both expanding potential output. The other pairs mainly work through aggregate demand, prices or the exchange rate. Demand-led measures risk inflation when capacity is limited.

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