Cambridge IGCSE and O Level Economics

Chapter 28: Supply-side policies

Suggested answers to individual and group activities
Group activities
1 a 
A disadvantage of cutting income tax rates is that income tax revenue may fall. This may occur
if the reduction does not stimulate an increase in output and incomes.
b Introducing more income tax bands may discourage work and effort as it will become more
complex to fill out tax forms. It may also mean that some higher tax rates are introduced,
which may discourage some people from working overtime or taking promoted posts. People
may become confused by the system and think they are paying more income tax than they
actually are.
2 a A
 reduction in bureaucratic red tape could increase private sector investment as firms would
have to spend less time and effort entering new markets and expanding in existing markets.
This would reduce their costs of production and enable them to respond more quickly to
changes in market conditions.
b A government could increase private sector investment in a number of ways. It could reduce
corporation tax. This could provide jobs, with more finance and more incentive to invest.
It could lower income tax, which may lead firms to invest more, in expectation of higher
demand. In addition, it could provide investment subsidies to firms.

Individual activities
1
1 a 
It is important that people are trained in skills that are in high demand so that they will be
able to gain jobs when they have completed their training.
b Training will increase potential economic growth. This is because those who have been
trained will be more skilful and so more productive. The maximum output that the economy
will be capable of producing will increase.
2 a O
 ne argument for removing employment laws is that it may encourage employers to take on
more workers. Having fewer rules and regulations may reduce their costs of production and
give them greater flexibility.
b Employment laws may only affect a small percentage of the labour force in those countries
where there is a large informal sector.
3 a P
 rivatisation may increase investment. Private sector firms can raise finance by selling shares
as well as borrowing. Privatisation may also encourage foreign direct investment. Foreign
firms may purchase former state-owned enterprises and may expand these.
b Investment could lower a firms’ cost of production and raise the quality of their output. This
could increase the price and quality competitiveness of the country’s products. As a result,
more exports may be sold and fewer imports purchased. If this is the case, export revenue
could rise and import expenditure fall. This could reduce a deficit on the current account of
the balance of payments.

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Cambridge IGCSE and O Level Economics

Suggested answers to multiple choice questions and

four-part question
Multiple choice questions
1 D
An increase in the threshold at which people pay income tax would mean that they would pay
less income tax. This may increase the incentive to work, encouraging existing members of
the labour force to work more hours and for some of the economically inactive to enter the
labour force. A and B are not supply-side policy measures as they are likely to reduce labour
productivity. C is also not a supply-side policy as it would be likely to reduce investment.
2 D
Higher interest rates will reduce total demand, which may lead to higher unemployment. A, B and
C are likely to increase total demand and raise employment.
3 A
A decrease in government expenditure is likely to reduce total demand and so may reduce
inflationary pressure. Lower government expenditure can directly reduce spending on imports
since some portion of it goes on imports. Lower government expenditure may also reduce
household income that, in turn, is likely to slow down economic growth and reduce employment.
4 D
A time lag between deciding and implementing government policies may mean that the policies
do not have the desired effect on the economy. A, B and C should all increase the effectiveness of
a government policy.

Four-part question 2

a Deregulation is the removal of rules and regulations.

b A cut in income tax is a fiscal policy measure if it has been made with the intention of increasing
total demand. A reduction in income tax will increase households’ disposable income, which may
encourage them to spend more. It might also be a supply-side policy measure if the intention is
to increase total supply. A lower rate of income increases the reward from working and so may
increase the supply of labour, which would increase productive potential. In some cases, the
policy measure may be used in an attempt to achieve both an increase in total demand and an
increase in total supply.
c A supply-side policy measure has the intention of increasing total supply. A higher total supply
will increase an economy’s productive potential. An ability to make more products will mean that
the economy’s production possibility curve will shift to the right as shown in the diagram below.

Capital
goods
B

0 A B Consumer
goods

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Cambridge IGCSE and O Level Economics

d One key supply-side policy measure, education and training, would be expected to reduce
unemployment. If workers are better educated and trained, they will be more skilful and more
productive. This will make them more attractive to employers. It should also mean that they
are more occupationally mobile. Should they lose a job, they should be able to find another one
relatively quickly.
Whether the other supply-side policy measures will always reduce unemployment is more
debatable. The intention behind cutting income tax and lowering unemployment benefit
may be to reduce unemployment by making work more attractive relative to depending on
unemployment benefit. If the gap between pay and unemployment benefit is widened, some
of the unemployed may search more actively for jobs. If, however, there is a lack of demand for
labour or if the unemployed do not have the skills to fill any job vacancies, unemployment will
not fall.
One of the aims of labour market reforms is also to reduce unemployment. If, for instance, it is
made easier for firms to hire and fire workers, firms may be encouraged to employ more workers.
There is, nevertheless, the possibility that removing employment protection may increase short-
term unemployment as workers may be made redundant on a more frequent basis.
It is debatable whether privatisation will increase or decrease unemployment. It may increase
employment if the industry responds to the greater exposure to market forces by becoming more
efficient and increases its sales. Privatisation, on the other hand, may not increase efficiency.
The industry may just change from a state-owned monopoly to a private sector monopoly. If so,
competitive pressures on the industry will not increase and it may not become more efficient. A
private sector industry may also be less concerned about keeping employment high than a state-
owned industry. Indeed, it may be prepared to reduce output in order to push up the price. If it
takes such action, unemployment would rise.
So it cannot be concluded that supply-side policy measures will always reduce unemployment. It
3
would be hoped that they would, but there is a chance that some may increase unemployment.
The outcome will be influenced by the supply-side policy measures used and how economic
agents respond to them.

© Cambridge University Press 2018