Cambridge International as and a level Economics Ebook

117
Chapter 5: Government macro intervention 

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SELF-ASSESSMENT TASK 
5.2
Decide whether the following are examples of fi scal, 
monetary or supply side policy measures:
a
an increase in unemployment benefi t
b
an increase in government spending on state 
pensions
c
an increase in the rate of interest
d
a reduction in restrictions on bank lending
e
a reduction in legal restrictions on fi rms
f
a reduction in the exchange rate.
Many countries in recent years have adopted privatisation 
programmes in the belief that fi rms operate more effi
ciently 
in the private sector. Some have also deregulated a number 
of markets by removing barriers to entry and laws and 
regulations that increase fi rms’ costs of production.
Government subsidies are widely used. Th
ese, in 
eff ect, lower fi rms’ costs of production and are designed to 
increase fi rms’ output.
Figure 5.2
 compares the three types of policies.
TOP TIP
Remember supply side policy measures always seek to 
increase aggregate supply. No government will try to 
reduce aggregate supply.
In deciding whether a change in income tax, 
corporation tax or a cut in unemployment benefit is 
a fiscal or supply side policy measure, think about 
what the intention is. If the government is trying to 
influence aggregate demand then it is a fiscal policy 
measure, whereas if the government is seeking 
to increase aggregate supply, it is a supply side 
policy measure.
Policies to correct balance of 
payments disequilibrium
Policy approaches
Th
ere are two broad-based policy approaches that can be 
used to correct an imbalance in the balance of payments. 
Th
ese are expenditure switching and expenditure 
dampening policies.
Types of Macroeconomic Policies
Fiscal
Instruments/
Measures
Government
spending
Taxation
Aim
Influence
aggregate
demand
Interest
rate
Money
supply
Exchange
rate
Influence
aggregate
demand
Aim
Instruments/
Measures
Monetary
Supply side
Instruments/
Measures
Subsidies
Deregulation
Privatisation
Trade
union
reform
Increased
spending on
education and
training
Cut in
corporation
tax
Cut in
income
tax
Increase
aggregate
supply
Aim