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behaviour changes in response

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Professor Arthur Laffer once stated 'when incentives change, people's ......

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A branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets

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Define supply-side economics

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Free-market revival

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Supply-side economics grew in significance in the 1980s as a part of what revival ?

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Capitalism and competitive markets

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Free-market economists believe in the virtues of what 2 things ?

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Fiscal policy

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Supply-side focused narrowly on the effects of what policy on the economy ?

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demand-management tool

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During the Keynesian era, most economists regarded fiscal policy (taxation) as what tool ?

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the government's budget deficit

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In Keynesian economics, what laid at the centre of fiscal policy ?

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Aggregate demand

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Keynesians focused on the effects of fiscal policy on what ?

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The microeconomic effects of demand-side keynesian fiscal policy

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Supply-side economics grew out of a concern over what ?

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Altering relative prices, particularly those of labour and leisure, in favour of work, saving and investment, and entrepreneurship against voluntary unemployment.

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The central idea of supply-side economics is that a tax cut should be used, not to stimulate AD keynesian style, but to create incentives by doing what ?

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Focus on the role of tax cuts in increasing personal incentives. They aim to improve the economy's ability to produce and supply more output.

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Define supply-side policies

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underlying structure of the economy and improve economic performance of markets, industries, individual firms and workers.

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Supply-side policy is the set of government policies which aim to change the .....

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They act on motivation and efficiency of individual consumers, workers and entrepreneurs within the economy

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Why are supply-side policies more microeconomic than macroeconomic ?

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productive potential

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Supply-side policies improve microeconomic incentives to enhance the general performance of the economy and the economy's .......

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Distortions or inefficiencies resulting from Keynesian neglect of the supply-side

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Why do Supply-side economists and free-market economists believe that Keynesianism causes low equilibrium levels ?

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1. Remove distortions 2. Improve incentives 3. Make markets more competitive

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To increase levels of output and unemployment, supply-side economists recommend using appropriate microeconomic policies to target what 3 things ?

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interventionist

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Government microeconomic policy in the UK was generally ......... during the Keynesian era in the 1960s and 1970s

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The role of markets

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Interventionist policies usually limit what ?

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Against interference because it disrupts activities of markets and private economic agents

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What is the supply-side view of interventionist policy ?

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enabler

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Supply-side microeconomic policies aim to change the economic function of government from provider to ....

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1. Work 2. Saving 3. Investment

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Tax cuts aim to create incentives for what 3 main things ?

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reduce the incentive to choose unemployment rather than a low-paid alternative

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Cuts in welfare benefits aim to do what ?

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1. Privatisation 2. Marketisation 3. Deregulation

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Supply-side economic policy includes what 3 policies ?

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Involves shifting ownership of state-owned assets to the private sector

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Define privatization

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Involves shifting the provision of goods or services from the non-market sector to the market sector

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Define marketisation (commercialism)

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Involves removing previously imposed regulations

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Define deregulation

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Enterprise culture

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Supply-side economists and other free-market economists wish to create what type of culture ?

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Dependency culture

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Supply-side economists attribute what culture to Keynesian mixed economy ?

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Entrepreneurship

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Supply-side economists heavily promote what ?

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disincentives which, by reducing national income as taxation increases, also reduce the government's total tax revenue

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Supply-side economists believe that high rates of income tax and the overall tax burden create what ? what is the overall impact ?

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Shows how the government's total tax revenue changes as the average tax rate increases from 0% to 100%

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What does the laffer curve show ?

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Rises and then falls beyond a certain %

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Laffer curve: Between 0% to 100%, what happens to tax revenue as the average rate of taxation increases ?

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at the highest point

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Where is tax revenue maximised on the Laffer curve ?

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counterproductive

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Laffer curve: Beyond the point of maximum tax revenue, any further increase in the average tax rate becomes what ?

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Cut tax rates

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Laffer curve: According to supply-side theory, what must the government do to increase total tax revenue ?

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economic growth

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A reduction in tax rates creates the incentives needed to stimulate .....

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Rises

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Faster economic growth due to tax cuts means what happens to total tax revenue despite lower tax rates ?

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Tax evade and avoid

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The incentive to engage in what activities should decrease at lower marginal tax rates ?

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Raised average tax rate beyond the critical point on the Laffer curve

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Supply-side economists argue that the increase in the tax burden in the Keynesian era needed to finance the growth of government and public sector resulted in what ?

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A production possibility frontier

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What diagram can be used to show the possible effect of a cut in government spending ?

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* refer to sheet *

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Draw a PPF showing the possible effect of a cut in government spending

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'Crowding out'

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Cutting government spending reserves what - caused by previous increases in public sector or government spending ?

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Sufficient unemployed resources for the private sector to employ

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A cut in public sector spending creates what ?

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Private sector output will grow

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Tax cuts may be justified by what optimistic view about private sector output ?

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Chancellor George Osbourne justified swingeing tax cuts when the coalition government took office in 2010

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Give a case specific example of when taxes have been cut and justified

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the shape of the supply curve of labour

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The supply-side theory of the effects of taxation on labour market incentives depends on what ?

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The percentage of the last pound of income paid in tax

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Define marginal rate of income tax

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An increase in the wage rate

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A cut in the income tax rate is equivalent to what ?

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Workers to supply more labour and promotes entrepreneurship

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A reduction in income tax rates creates the incentives for what ? (2 marks)

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disincentive effect

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An increase in income tax rates has what effect on effort and the supply of labour

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Above a certain wage rate (income tax rate cut), workers will supply less labour because they prefer extra leisure time

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What does a backward bending supply curve show ?

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Backward-bending supply curves (labour)

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What may weaken the supply-side argument that tax cuts increase real national output and efficiency through effect on labour market incentives ?

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Rate of economic growth increases, which boosts government tax revenues more than the earlier cuts in tax rates.

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Why do many supply-siders argue that taxes can be cut, public spending can be increased and government borrowing and inflation can be controlled ?

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How much incentive investors and entrepreneurs have to attain more wealth, which hinges on their tax rate.

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Economic performance hinges almost entirely on what ?

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the rich

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The Laffer curve was an economic recipe for tax cuts for who ?

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they pay for spending in sectors without a growing budget deficit

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What do neo-conservatives believe about higher tax revenues resulting from tax cuts ?

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Moderate supply-side economists

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Osborne and other conservative members of the UK government are regarded as what type of economists ?

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Tax cuts can be self-financing and that they are all that is needed to generate economic growth

answer

What is the extreme supply-side argument for tax cuts ?

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in order to Incentivise the population

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Why do extreme supply-side economists justify greater income inequality ?

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The sovereign debt problem

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Few politicians now call for continuous large budget deficits as the way to achieve growth and full employment since what issue ?

question

1. Work 2. Saving 3. Investment 4. entrepreneurship

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There is a general agreement among economists and politicians that the tax structure should be used in a supply-side way to create incentives for what 4 things ?

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Income paid by rich people to the poorer people they employ

answer

Define the trickle down effect

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That fiscal policy should be used to manage aggregate demand

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The majority of supply-siders reject what view about fiscal policy ?

question

simply leads to inflation with no long-run increase in real output

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What is the supply-sider/ free-market economist view of expansionary fiscal policy

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Tax cuts - rich people's disposable income increases with tax cuts and respond by employing more poor people

answer

Some supply-siders believe that the poor can benefit from what supply-side policy and how ?

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1. Industrial policy measures 2. Labour market measures 3. Financial capital measures

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What are the 3 main measures of supply-side policy

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1. Privatisation 2. Marketisation 3. Deregulation 4. Internal markets 5. Encouraging the private sector to introduce supply-side reforms

answer

What are the 5 main policies of industrial policy measures?

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1. Lower rates of income tax 2. Reducing state welfare benefits to average earnings 3. Changing employment law to reduce the power of trade unions 4. Introducing short-term contracts 5. Repealing legislation which limits employer's freedom to employ 6. More flexible pension arrangement 7. Improving the training of labour

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What are the 7 main policies of labour market measures ?

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1. Deregulating financial markets 2. Encouraging saving 3. Promoting entrepreneurship 4. Reducing public spending and public sector borrowing

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What are the 4 main policies of financial and capital market measures ?

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- Removes barriers to market entry to increase competition - Gets rid of beurocracy which increases firm's costs of production

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Industrial policy measures: Explain how deregulation creates incentives (2 marks)

question

- Provide a form of commercial discipline and improve efficiency - Substitutes for privatization - The tax payer continues to finance but the industry may have to perform for financing

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Industrial policy measures: Explain how internal markets create incentives

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Tax payer continuing to finance schools but they earn money according to their performance, such as how many pupils they attract.

answer

Give an example of internal markets

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Removes the low-paid from the tax net

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Lower rates of income tax: Explain how raising tax thresholds or personal tax allowances creates incentives to work

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Creates incentive to choose low-paid employment in preference to claiming unemployment-related benefits

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Explain how lower benefit levels create incentives

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- Made more difficult to claim

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How else, other than lower benefit levels, can welfare benefits be made less attractive ?

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1. Removing trade unions' legal protection 2. Restricting the rights of trade unions 3. Extending the freedom for workers not to belong to unions 4. Employers not recognizing or negotiating with unions 5. Replacing collective bargaining with individual wage negotiation 6. Restricting the right to strike 7. Undertake industrial action

answer

How can reducing the power of trade unions be achieved ? (7 marks)

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1. Replacing 'jobs for life' with short-term labour contracts 2. Introducing profit-related and performance-related pay

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Give two examples of 'introducing short-term contracts'

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Lead to greater poverty inequality for ordinary workers in an exploited part-time labour force.

answer

What are the criticisms of introducing short-term contracts ?

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Making it easier for employer's to 'hire and fire' workers

answer

Explain how repealing legislation which limits employer's freedom to employ works

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- Encouraging workers to arrange private pension plans to reduce the burden on taxpayers - Allowing workers to transfer private sector pensions between employers when changing jobs

answer

give 2 examples of how 'more flexible pension arrangements' creates incentives

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establishing training agencies and academies to develop vocational technical education

answer

Give an example of 'improving the training of labour' to create incentives

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UK governments have rejected the proposal to impose a training tax on all employers to prevent free-riding by firms with no training schemes

answer

Give a case specific point on 'improving the training of labour' in the UK

question

1. Creating greater competition among banks and building societies 2. Opening up the UK financial markets to overseas banks and financial institutions

answer

Give 2 examples of 'deregulating financial markets'

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1. Increase the supply of funds 2. Reduce the cost of borrowing for UK firms

answer

'Deregulating financial markets': Reforms should do what 2 things for UK firms ?

question

the removal of foreign exchange controls

answer

Financial deregulation and what else encourages 'inward investment' by overseas firms (e.g. Nissan, Samsung)

question

1. Governments created tax privileges for saving 2. Encouraged saving by giving individual shareholders first preference in the market for shares issued when former nationalised industries were privatised.

answer

Give 2 examples of how 'encouraging saving' creates incentives

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Most individual shareholders have sold their shares to institutional shareholders

answer

What has negated one of the main reasons for privatisation in the UK ?

question

very low interest rates 0.5% by monetary policy

answer

Encouraging saving: what has discouraged saving in recent years ?

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1. Company taxation has been reduced 2. Markets have been deregulated to encourage risk taking

answer

How have government's encouraged growth of capitalism and enterprise culture ? (2 marks)

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1. To free resources for private sector use 2. Avoid crowding out

answer

Reducing public spending and public sector borrowing: why has this been done ?

question

They are usually very effective but have a significant lag-time, which means they may not be in power to reap the successes of their supply-side policies

answer

Why are many politicians, especially in the run up to elections, reluctant to use supply-side policies

AQA Book: Chapter 25 Supply-side economics and supply-side policies – Flashcards

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