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Supply-side Policies · Paper 2 — Free Economics SL Practice Questions
1MasteryLAQObjectives of supply-side policies10 marksPaper 2~15 min
The government of Country X, a developing nation in Southeast Asia, is concerned about its long-run economic growth rate. The country has a young population, high unemployment, and a significant informal economy. The government is considering a set of supply-side policies aimed at improving labour productivity and incentivising formal-sector employment.
(a)
Explain two objectives of supply-side policies that the government of Country X could pursue to increase its long-run productive capacity. [4 marks]
(b)
Evaluate the potential effectiveness of one interventionist supply-side policy and one market-based supply-side policy that Country X could implement to raise labour productivity and reduce informal-sector employment. In your answer, refer to the specific context of Country X and consider the perspectives of at least two different stakeholders. [6 marks]
Solutions
2MasteryLAQObjectives of supply-side policies10 marksPaper 2~15 min
Country Y is a high-income OECD member. In 2023, its government announced two supply-side reforms:
- The marginal rate of corporate income tax was cut from to .
- The maximum duration of unemployment benefit was reduced from 24 months to 12 months.
The stated aim is to increase long-run potential output and reduce structural unemployment.
(a)
Explain how each of the two reforms intended to achieve a supply-side objective. [4 marks]
(b)
Using an AD/AS , analyse the expected long-run macroeconomic effect of these two reforms combined. [3 marks]
(c)
Evaluate the view that the benefits of these two reforms to Country Y's economy outweigh the costs, considering the perspectives of both firms and workers. [3 marks]
Solutions
3ChallengeLAQObjectives of supply-side policies10 marksPaper 2~15 min
Country X is a developing nation with a large informal economy (estimated at of GDP) and an unemployment rate of . The government implemented a package of supply-side policies:
- (i) Deregulation of the labour market, reducing the minimum wage and lowering hiring and firing costs
- (ii) A corporate tax cut for manufacturing firms
- (iii) Large-scale government investment in digital infrastructure (broadband mobile networks)
(a)
Define "supply-side policy" and state one objective of such policies. [2 marks]
(b)
Using an AD/AS , explain how labour market deregulation and the corporate tax cut could affect the aggregate supply of Country X. [4 marks]
(c)
Evaluate the view that the combination of market-based and interventionist supply-side policies implemented by Country X is the most effective way to increase productivity and reduce unemployment, given that of GDP originates in the informal economy. [4 marks]
Solutions
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