Answer to Question #218445 in Macroeconomics for charene

Question

The Aggregate Demand- Aggregate Supply (AD-AS) model can be used to illustrate the right combination of policies in an economy. Discuss four supply-side measures that policy makers can be implemented to expand the economy and explain why supply-side measures are more desirable than demand-side measures?

Answer 1

Supply-Side Measures

·Privatization is number one. Selling state-owned assets to the private sector is one example. The private sector, it is believed, is more effective in running enterprises because it has a profit motive to cut costs and improve services. More information on privatization can be found here.

·        Liberalization. This entails lowering entry barriers to allow new businesses to enter the market. The market will become more competitive as a result of this. In telecommunications, for example, BT used to be a monopoly, but now multiple companies fight for our business. Lower pricing and higher quality goods or services are usually the results of the competition.

·Privatization is number one. Selling state-owned assets to the private sector is one example. The private sector, it is believed, is more effective in running enterprises because it has a profit motive to cut costs and improve services. More information on privatization can be found here.

·Financial markets should be deregulated. Building societies, for example, were allowed to become profit-making banks. More competition should result from deregulation, which should, in principle, cut borrowing rates for consumers and businesses.

Why Supply-Side Measures Are More Desirable Than Demand-Side Measures

Supply-side policies can be used to lower inflation rates, and they are perhaps more effective in the long run than demand-side measures. This leads the price level to fall from P1 to P2, lowering inflationary pressure in the UK and assisting in the long-term maintenance of low inflation.