Supply-Side Policies: three questions to try now
Real questions, the answer key from the mark scheme, and the explanation that goes with it. No account needed to answer them.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 1
A government decides to borrow from the general public in order to finance its extra spending on apprenticeship training schemes. Which types of macroeconomic policy are being used?
Answer: A.
Take the three in turn against what the government actually did.
Fiscal policy is any deliberate change in government spending or taxation. Here spending rises, so fiscal policy is being used. The fact that it is paid for by borrowing rather than by tax does not change that; borrowing is how the spending is financed, not a separate kind of policy.
Monetary policy means the central bank acting on the interest rate or the money supply. Borrowing from the general public sells bonds to people who already hold the money, so purchasing power is transferred rather than created. No new money enters circulation and the central bank has done nothing, so monetary policy is not being used. This is the step that decides the question, and it is why C and D are wrong: both claim fiscal policy is absent, which cannot be right when government spending has risen.
Supply side policy raises the productive capacity of the economy. Apprenticeship training improves the skills of the workforce, which shifts long run aggregate supply to the right, so supply side policy is being used. B is the trap for anyone who spots the fiscal element and stops there: it treats the training as ordinary spending and misses that what the money buys is productive capacity.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 2
A government decides to remove fees for higher education provided by the public sector and the private sector.
What is the consequence of this policy?
Answer: A.
Cross-board concept practice · originally a CIE 9708 question, used here because the concept is the same. It is not IB Economics past-paper material.
Question 3
Supply-side policies can be used to correct cost-push inflation. Which policy would best achieve this aim in the long run?
Answer: D.
Explanation:
- Cost-push inflation occurs when the costs of production increase, leading to an increase in prices. Supply-side policies aim to increase the economy's ability to produce goods and services, which can help to reduce inflationary pressures in the long run.
- Increasing productivity through technological advancements and automation can help to reduce the costs of production. By supporting the replacement of labour-manned machines by the use of robots, a country can improve efficiency and reduce labour costs, ultimately lowering the pressure on prices to rise due to increased production costs.
- Allowing trade unions to maintain work practices irrespective of productivity (option A) would not be effective in reducing cost-push inflation as it could prevent necessary changes in the production process to increase efficiency and reduce costs.
- Encouraging workers to work extra hours for extra pay (option B) may not necessarily address the underlying causes of cost-push inflation. It may increase production in the short term but is unlikely to have a significant impact on long-term cost pressures.
- Increasing total labour supply by employing more unskilled workers (option C) may lead to an increase in production but may not address the specific issue of increasing costs contributing to cost-push inflation.
What this practice covers
These questions are drawn from past Cambridge papers, mapped across to this topic because the concept is the same. You answer, you find out immediately whether you were right, and you get the reasoning for the correct option and for each distractor. Wrong answers go to a mistakes locker so you can come back to exactly those.
Practice is free. You need an account only so your progress and your mistakes are still there next time.
What examiners see students get wrong here
These are the errors that cost marks on supply-side policies, taken from our own topic notes. Read them before you practise and you will recognise the traps in the questions.
- Confusing supply-side policies with SRAS shifts caused by cost changes. A wage rise shifts SRAS, but it is not a supply-side policy.
- Classifying policies wrongly, remember: market-based removes obstacles, interventionist provides directly.
- Claiming supply-side policies fix a recession quickly. Their lags are the longest of any policy.
- Drawing AD shifting right instead of LRAS.
- On the PPC, moving from inside the curve to the frontier and calling it potential growth.
- Ignoring the distributional consequences of market-based reforms.
- Treating tax cuts as certainly raising work effort, ignoring the income effect.
Revise it first
If any of the above is unfamiliar, work through the notes before practising: Supply-Side Policies revision notes.