Key Idea: Topic 3.7 explains how supply-side policies (SSPs) increase the economy's productive capacity by shifting LRAS right. Two approaches: market-based (reduce intervention) and interventionist (active government investment).
✅ Core definitions
- Supply-side policies
- Government policies that shift LRAS right — increase potential output, enabling sustained non-inflationary growth.
- Market-based SSPs
- Reduce government intervention: deregulation, privatisation, trade liberalisation, tax cuts, labour-market reform.
- Interventionist SSPs
- Active government investment: education, healthcare, infrastructure, R&D, industrial policy.
🏪 Market-based policies
- Deregulation — fewer rules → lower costs → more competition
- Privatisation — state → private ownership (profit motive → efficiency)
- Trade liberalisation — lower tariffs → international competition → specialisation
- Tax reform — lower corporate/income rates → incentivise work and investment
- Labour-market reform — weaker unions, flexible hiring → reduce structural unemployment
🏛️ Interventionist policies
- Education and training — builds human capital → productivity↑ → structural unemployment↓
- Healthcare — healthier workers → fewer sick days, longer working lives
- Infrastructure — transport, energy, broadband → lower business costs
- R&D subsidies — innovation → new technologies → productivity↑
- Industrial policy — support strategic sectors (South Korea semiconductors, Singapore education)
⚖️ Comparison
Market-based: Cheaper and faster to implement. Risk: increased inequality. Risk: market failures persist. Neoclassical school.
Interventionist: Addresses root causes (market failures). Risk: expensive + long time lags. Risk: government failure. Keynesian school.
🔑 Key exam points
- SSPs shift LRAS right — the ONLY way to achieve sustained non-inflationary growth
- SSPs cannot fix recessions (need demand-side policies for that)
- Both approaches have long time lags and uncertain outcomes
- Best answers discuss both types and match to the specific context
SSPs are the long-run complement to demand-side policies. Monetary/fiscal policy manages the cycle; SSPs build long-run capacity.