2.6.3 Supply-side policies Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Which of these is a market-based supply-side policy?

   • Cutting the basic rate of income tax to strengthen incentives to work
   • Introducing a statutory minimum wage for all workers over 21
   • Building new motorways funded directly by central government spending
   • Government funding of a new national network of technical colleges

2. Supply-side policies are designed mainly to shift which curve on an AD/AS diagram?

   • The aggregate demand curve to the right
   • The aggregate demand curve to the left
   • The short-run Phillips curve to the right
   • The long-run aggregate supply curve to the right

3. Which is an example of an interventionist supply-side policy?

   • A government-funded national apprenticeship programme for young workers
   • Cutting corporation tax to 19 per cent
   • Weakening the legal powers of trade unions
   • Privatisation of a state-owned rail operator

4. Which best describes a market-based policy to promote competition?

   • Government ownership of a new steel plant to guarantee supply
   • Subsidies that protect declining industries from foreign rivals
   • Deregulation that removes barriers preventing new firms from entering an industry
   • Setting legal maximum prices for utilities to protect consumers

5. Which is a strength of supply-side policies compared with demand-side policies?

   • They act instantly on consumer spending in every period
   • They remove the need for any government spending at all
   • They can raise potential output without adding directly to aggregate demand and demand-pull inflation
   • They always cut the budget deficit to zero within a year

6. Which policy would most directly improve the quality of the labour force?

   • Reducing employer National Insurance contributions
   • Abolishing the statutory minimum wage
   • Reducing the number of employment tribunals
   • Expanding vocational training and retraining programmes

7. A successful supply-side policy most directly leads to which effect on the economy in the long run?

   • A rightward shift of AD with no change in potential output
   • A leftward shift of aggregate demand with lower output
   • A movement up the SRAS curve with a fall in potential output
   • A rightward shift of LRAS, raising potential output

8. Which is a key weakness of supply-side policies?

   • They often take a long time to have an effect and can be costly to fund
   • They act on demand immediately and always reduce unemployment to zero
   • They have no effect on productivity or costs
   • They always raise the price level sharply in the short run

9. A government cuts the top rate of income tax. Which chain of effects best reflects the supply-side logic?

   • Higher take-home pay cuts consumer spending and shifts AD to the left
   • Lower tax makes workers prefer leisure at every wage, reducing labour supply
   • Lower tax revenue immediately shifts LRAS to the left as workers lose benefits
   • Higher take-home pay raises incentives to work, which can increase labour supply and potential output over time

10. A government funds a £2 billion programme of rail electrification. What is the most likely supply-side effect?

    • Lower transport costs for firms, raising potential output over time
    • Higher inflation caused by a fall in productivity across the economy
    • An immediate fall in aggregate demand as government spending is cut
    • A leftward shift of LRAS because of higher corporation tax on rail users

11. Which AD/AS outcome best shows the intended effect of a successful infrastructure investment programme?

    • AD shifts left while LRAS is unchanged
    • AD shifts right and the price level rises with no change in LRAS
    • LRAS shifts right, with the price level tending to fall for a given AD
    • SRAS and LRAS both shift left

12. Which pair of policies is most consistent with reforming the labour market?

    • Cutting restrictive hiring rules and reducing long-term unemployment benefits to encourage job search
    • Raising the national minimum wage and extending employment protection for all workers
    • Setting public sector pay through central bargaining with automatic inflation rises
    • Introducing a statutory maximum working week and cutting training budgets

13. A privatised utility is deregulated to allow more competitors. Which is a likely drawback?

    • An automatic rise in productivity without any new investment
    • An immediate fall in unemployment through a rise in aggregate demand
    • Lower prices for every consumer in every case, with no risks
    • Possible market failure if the remaining dominant firm gains and abuses monopoly power

14. Trade union reform reduces unions' legal power to call strikes. What is the intended supply-side effect?

    • A leftward shift of aggregate demand as consumer confidence falls
    • More labour market flexibility and less wage pressure from strike action
    • A long-run fall in employment as firms lose skilled workers
    • Higher unit labour costs for firms across all industries

15. A government wants to cut unemployment with supply-side policy. Which evaluation identifies the main limitation most clearly?

    • The effects of supply-side policy are immediate and fully predictable
    • Supply-side policies cannot affect unemployment by any means at all
    • Benefits depend on time lags and on whether the unemployed have the skills firms demand, so structural mismatch may persist
    • Supply-side policies always raise inflation sharply in every economy

16. Which statement most accurately compares market-based and interventionist supply-side policies?

    • Both types of policy only affect aggregate demand in the short run
    • Interventionist policies always reduce government spending overall
    • Market-based policies require government ownership of key industries
    • Market-based policies rely on incentives and competition, whereas interventionist policies involve direct government provision or funding

17. Why might a rightward shift of LRAS fail to reduce the price level if AD also shifts right by more?

    • LRAS and AD are unrelated concepts in macroeconomic theory
    • The economy is always at full employment, so output cannot grow at all
    • Supply-side policies always shift AD to the left at the same time
    • The price level rises if AD increases by more than LRAS, so the net effect may be inflationary

18. A policy raises potential output by 3 per cent but the economy starts below full capacity. In the short run, what is most likely?

    • Output rises towards the new potential as spare capacity is used, with limited upward pressure on prices
    • Output falls by 3 per cent immediately as firms cut back
    • The price level doubles as productive capacity increases
    • Unemployment rises because potential output has increased

19. A firm argues that deregulating its industry will improve efficiency. Which evaluative point is strongest?

    • Deregulation has no effect on the structure of any market
    • Efficiency gains depend on effective competition, since without it firms may exploit consumers despite lower regulation
    • Deregulation always leads to cartels being formed in every industry
    • Deregulation increases government revenue by definition in all cases

20. Which is the best evaluation of supply-side policies aimed at reducing the natural rate of unemployment?

    • They can reduce structural unemployment over time, but they may be costly and their effect depends on wider conditions and implementation
    • They are costless and always immediately effective in every economy
    • They only reduce cyclical unemployment during a recession
    • They permanently increase cyclical unemployment in the long run

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