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

Which of the following is a supply-side policy that a government might use to raise the long-run productive capacity of the Indian economy?

Spending on vocational training is a supply-side policy because it improves labour quality and productivity, shifting long-run aggregate supply outward. The other options mostly change aggregate demand through interest rates, transfers or the money supply, or restrict trade, rather than expanding capacity.

  1. ACutting the repo rate to stimulate borrowing for consumption
  2. BIncreasing public spending on vocational training and skills developmentCorrect
  3. CRaising government transfer payments to households to lift demand
  4. DImposing a temporary import quota to protect domestic firms
  5. Raising the cash reserve ratio to reduce money supply

Explanation

Supply-side policies aim to shift long-run aggregate supply by improving the quantity or quality of factors of production. Skills training raises labour productivity. The other options mainly operate on aggregate demand or restrict trade rather than raising productive capacity.

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