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

An Indian government scheme provides regional development grants to firms locating in a low-income state. Which outcome best matches the policy's intended effect?

Regional grants aim to attract firms and jobs to a low-income state, reducing regional unemployment and raising capacity. The drawback is deadweight loss, since some grants subsidise investment that would have happened anyway. The other outcomes are unrelated to this policy or contradict its purpose.

  1. AReduced regional unemployment through investment, but a risk that grants subsidise projects that would have happened anywayCorrect
  2. BGuaranteed higher exports from all firms in the country
  3. CA fall in structural unemployment through higher interest rates
  4. DA lower level of capital investment in the state
  5. A rise in demand-pull inflation because of lower taxes

Explanation

Regional grants aim to attract investment and jobs to depressed areas, reducing regional and structural unemployment. A known drawback is deadweight loss, where grants go to firms that would have invested anyway. The other options do not follow from the policy.

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