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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 an economy?

The main objective of supply-side policies is to increase productive capacity and shift long-run aggregate supply outward. They do this by improving productivity, efficiency and incentives, rather than by stimulating spending, which is the aim of demand-side policy.

  1. ATo raise aggregate demand quickly by cutting interest rates
  2. BTo increase the economy's productive capacity and shift long-run aggregate supply outwardCorrect
  3. CTo reduce the government's budget deficit through higher taxes
  4. DTo fix the exchange rate at a target level
  5. To raise prices for domestic producers through import quotas

Explanation

Supply-side policies work on the production side of the economy. They aim to raise productivity, efficiency and potential output, which shifts long-run aggregate supply to the right. Cutting interest rates is a demand-side tool, so that option is wrong.

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