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

Which statement best describes the main objective of supply-side policies in a macroeconomy?

Supply-side policies aim to raise the economy's productive capacity, shifting long-run aggregate supply to the right. They do this by improving incentives, competition, skills and infrastructure. Interest rate cuts and similar measures are demand-side tools that work on aggregate demand instead.

  1. ATo raise aggregate demand by cutting interest rates in the short run
  2. BTo increase the economy's productive capacity and shift long-run aggregate supply to the rightCorrect
  3. CTo reduce the budget deficit by raising income tax rates
  4. DTo fix the exchange rate at a target level
  5. To increase imports by lowering tariffs on consumer goods

Explanation

Supply-side policies work on the productive side of the economy, through incentives, competition, skills and infrastructure. Their aim is to raise potential output, which shifts long-run aggregate supply to the right. Cutting interest rates is a demand-side tool, so the first option is wrong.

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