Lesson 4.2.5.2

4.2.5.2 Supply-side policies Quiz: AQA Economics, Unit 2

20 questions

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Lesson 4.2.5.2, Supply-side policies: 20 multiple choice questions for the AQA Economics (7136), Unit 2: The national and international economy, written with Revision Ninja.

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The 20 questions

  1. What is the difference between supply-side policies and supply-side improvements?

    • They are the same thing, and the terms can be used interchangeably in every context
    • Supply-side policies are measures to raise productive potential, while improvements are the actual rises in capacity that result
    • Improvements are policies set by central banks, while policies are set by firms
    • Supply-side policies are increases in output, while improvements are measures introduced by the government

  2. How can supply-side policies help to achieve supply-side improvements in the economy?

    • By raising productivity, improving incentives and removing barriers, which increases the economy's productive potential
    • By increasing the exchange rate, which lowers the price of imports
    • By reducing government spending on education and training
    • By raising interest rates, which reduces the supply of money in the economy

  3. Which of the following is an example of a free market supply-side policy?

    • Privatisation of state-owned industries
    • Government spending on research and development
    • Subsidies to firms in declining industries
    • Industrial policy directed by the state

  4. Which of the following is an example of an interventionist supply-side policy?

    • Cutting income tax to encourage work
    • Government spending on education and training
    • Privatising a state-owned rail company
    • Deregulation of the financial sector

  5. How might supply-side policies reduce the natural rate of unemployment?

    • By improving skills and labour market flexibility, which reduces structural and frictional unemployment
    • By reducing aggregate demand, which removes the need for jobs
    • By increasing the exchange rate, which lowers wages
    • By raising the price level, which reduces the number of unemployed workers

  6. Why might tax changes designed to alter personal incentives increase the potential output of the economy?

    • Higher tax rates always increase the incentive for entrepreneurs to start businesses
    • Tax changes have no effect on potential output, which depends only on the money supply
    • Lower tax rates can encourage more people to work, save and invest, raising the labour supply and capital stock
    • Lower tax rates reduce the supply of labour, which raises the potential output of the economy

  7. Why do supply-side changes often originate in the private sector?

    • Government always creates all productivity improvements through direct spending
    • Productivity improvements, innovation and investment are often driven by firms independently of government
    • Supply-side changes only come from changes in interest rates set by the central bank
    • Private firms are not able to improve productivity without government permission

  8. Which policy is an example of intervention to correct a market failure related to short-termism?

    • Privatisation of a national airline, which removes all government involvement
    • Deregulating the banking sector to increase competition in lending
    • Cutting corporation tax to encourage firms to pay higher dividends
    • Government subsidies for research and development, which support long-term investment that firms may underprovide

  9. The government cuts corporation tax to attract investment. What is the most likely effect on long-run aggregate supply and growth?

    • It raises the price level in the short run, but has no effect on long-run growth
    • It has no effect on LRAS, because tax changes only affect aggregate demand
    • It may raise investment and productive capacity, shifting LRAS right and supporting a higher trend growth rate
    • It reduces investment and productive capacity, shifting LRAS left and slowing growth

  10. Why do supporters argue that privatisation can improve efficiency?

    • Privatisation means the government sets the prices charged by all firms
    • Privatisation removes all firms from the market, which reduces the cost of production
    • Privatised firms face no competition, so they can raise prices without limit
    • Private owners face competitive pressure and profit incentives that encourage cost control and innovation

  11. A government deregulates the labour market by reducing employment protection. What is a likely effect on unemployment?

    • It may reduce unemployment by making firms more willing to hire, though it may also reduce job security for workers
    • It has no effect on unemployment, because it changes only wages
    • It always raises unemployment, because firms stop hiring any workers at all
    • It reduces the natural rate permanently to zero

  12. Government-funded training raises the skills of unemployed workers. What is the likely effect on structural unemployment?

    • It falls, because workers are better matched to available jobs
    • It is unchanged, because training affects only frictional unemployment
    • It rises, because training increases the number of people looking for work
    • It becomes cyclical, because training depends on the level of demand

  13. Improved productivity reduces the current account deficit. Through which route is this most likely?

    • Higher productivity makes exports more competitive, raising export revenue and improving the trade balance
    • Higher productivity lowers the exchange rate, which increases the deficit
    • Higher productivity reduces exports, which lowers the deficit in the long run
    • Higher productivity raises imports, which reduces the trade deficit

  14. Which of the following is an interventionist supply-side policy rather than a free market policy?

    • Industrial policy in which the state directs investment into strategic sectors
    • Removing barriers to entry for new firms in an industry
    • Privatising state assets to introduce competition
    • Cutting income tax rates to increase the incentive to work

  15. Evaluate the time lags involved in supply-side policies.

    • Supply-side policies have immediate effects on capacity, with no time lag at all
    • Supply-side policies never change productivity, so there are no lags to consider
    • Supply-side policies often take years to affect productivity and capacity, so their benefits may come after the policy is announced
    • Supply-side policies only work through interest rates, which act within a week

  16. A government invests in road and rail infrastructure. What is the most likely supply-side effect?

    • Only aggregate demand is affected, because infrastructure does not affect supply
    • Transport costs fall and access to markets and labour improves, raising productive capacity
    • The exchange rate appreciates, so the economy becomes less competitive
    • Transport costs rise and productive capacity falls, because of increased government borrowing

  17. Evaluate supply-side policies compared with demand-side policies in tackling persistent unemployment.

    • Supply-side policies are always superior, because demand-side policies never affect unemployment
    • Neither policy has any effect on unemployment in any circumstance
    • Demand-side policies are always superior, because supply-side policies never affect unemployment
    • Supply-side policies may address structural causes of unemployment, but they are slower and cannot fix a lack of demand alone

  18. Supply-side policies such as privatisation can have microeconomic effects as well as macroeconomic effects. Which example illustrates a microeconomic effect?

    • Changes in the national budget deficit following a tax cut
    • Changes in the overall rate of inflation across the whole economy
    • Changes in the exchange rate following a rise in interest rates
    • Changes in competition and prices within a particular industry after privatisation

  19. Why might supply-side policies not reduce inflation in the short term?

    • Inflation is determined only by government spending in the short run
    • Their effects on productive capacity take time, while inflation depends on demand and short-run costs
    • Supply-side policies only affect the exchange rate, not prices
    • Supply-side policies always raise inflation immediately, so they cannot reduce it

  20. Evaluate whether free market supply-side policies improve welfare when a market failure exists.

    • Not necessarily, because markets with market failure may need intervention to correct problems such as short-termism or externalities
    • Yes, because market failures are always eliminated by free market policies
    • Yes, free markets always maximise welfare, even when there are market failures
    • No, free markets never affect welfare, whether or not there is any market failure

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