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

Which statement identifies a key weakness of interventionist supply-side policies such as state-funded training and research subsidies?

The main weakness is that they cost public money with an opportunity cost, take a long time to produce results, and risk government failure if officials fund the wrong skills or projects. They can raise productivity, so claims of no effect or permanent harm to capital are incorrect.

  1. AThey always raise inflation immediately by increasing aggregate demand only
  2. BThey cannot affect productivity because firms ignore government schemes
  3. CThey involve opportunity cost and time lags, and government may choose projects or skills poorlyCorrect
  4. DThey reduce the stock of capital in the economy permanently
  5. They remove all incentives for private firms to invest

Explanation

Such policies use public funds, so there is an opportunity cost, and benefits take years to emerge. Government may also pick the wrong skills or projects (government failure). The other statements are overstated or incorrect, since the policies can raise productivity and capital.

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