Cambridge International as and a level Economics Ebook

Supply side policy
Supply side policy
measures are designed to increase 
aggregate supply by improving the workings of product 
Monetary policy: 
the use of interest rates, direct control 
of the money supply and the exchange rate to influence 
aggregate demand.
Interest rate: 
the price of borrowing money and the reward 
for saving.
Money supply: 
the total amount of money in a country.
KEY TERMS
Supply side policy: 
measures designed to increase 
aggregate supply.
KEY TERM
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Cambridge International AS Level Economics

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and factor markets. They may involve reducing 
government intervention or, in some cases, increasing it. 
The measures include cutting corporation tax, cutting 
income tax, reducing welfare payments, increasing 
spending on education and training, increasing 
spending on infrastructure, trade union reform, 
privatisation, deregulation and provision of government 
subsidies.
Cutting corporation tax may encourage investment, 
as fi rms will have more funds to invest and they will 
know that they will be able to keep more of any profi t 
earned. More investment will increase both aggregate 
demand and aggregate supply. Cutting income tax may 
SELF-ASSESSMENT TASK 
5.1
Changes in monetary policy
The main monetary policy measure used has 
traditionally been direct changes in the central bank’s 
interest rate, called bank or repo rate, and such 
changes have been mainly used to control inflation. 
In the first decade and start of the second decade of 
the 2000s, however, the governments of a number 
of countries – including Japan, the USA and the 
UK – shift ed their priorities to encouraging an increase 
in economic activity. To achieve this they adopted 
rather more unorthodox monetary policy measures 
concerned with changing interest rates more indirectly 
and with providing details about future plans on 
interest rates.
One of these measures is what is known as 
quantitative easing. This involves the central bank 
printing money in order to buy financial assets,