Economics AS · Government macroeconomic intervention. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.
Supply-side policy is any government measure that aims to increase the economy's ability to produce. It works on aggregate supply, not aggregate demand. If it succeeds, the LRAS curve shifts to the right and the production possibility curve shifts outwards.
The two objectives are higher productivity (more output from each unit of input) and higher productive capacity (a larger maximum output). Tools include education and training, building infrastructure such as roads and ports, and support for new technology and research.
With LRAS further to the right, the economy can produce more real output at a lower price level. These policies take time to work, and they do little in a deep recession when the problem is weak demand.
A rise in total output is not the same as a rise in productivity. Productivity is output per worker, so always divide output by the number of workers before you compare.
Answer: Labour productivity has risen by 25% (output itself rose by 50%, which is not the same thing).
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