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

Which feature best explains why supply-side policies are often criticised as being slow to affect the economy?

Supply-side policies are slow because they work through improvements in skills, infrastructure, incentives and market efficiency, which take years to build and show up in productivity. Their benefits therefore appear in the long run rather than immediately.

  1. AThey always cause an immediate rise in the price level
  2. BThey work mainly by changing incentives and capacity, so effects such as improved skills or infrastructure take years to materialiseCorrect
  3. CThey only affect the financial services sector
  4. DThey rely on changes in the exchange rate regime
  5. They reduce aggregate supply in the short run by design

Explanation

Education, training, infrastructure and reforms to labour or product markets need long gestation periods before they raise productivity. Hence the time lag is the standard criticism. They are not tied to price rises or to one sector.

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