While supply-side policies primarily aim to increase productive capacity, they also create significant effects on aggregate demand.
These effects vary between interventionist and market-based approaches.
NoteSupply-side policies often have both long-term supply effects and immediate demand effects.
Effects of Interventionist Policies
- Government spending on education directly increases aggregate demand (as it is one of the factors of AD).
- Healthcare infrastructure investment stimulates construction sector demand.
- Research funding creates immediate employment in research sectors.
- Infrastructure projects boost demand for construction materials and labour.
- Industrial support programs increase business spending and investment.
With respect to point 3 and 4, this increases the number of households who have a higher disposable income, leading to increase in consumption and aggregate demand.
ExampleWhen a government builds new transport infrastructure, it immediately creates jobs and increases demand for construction materials, while also building long-term productive capacity.
Effects of Market-Based Policies
- Lower business taxes increase firms' disposable income for investment.
- Reduced personal income taxes boost household consumption spending.
- Capital gains tax cuts stimulate investment in financial markets.
- Deregulation costs initially reduce aggregate demand through job losses.
- Privatisation can temporarily increase private sector investment spending.
By providing higher disposable income, it can increase household spending/consumption and business investments. Therefore, it increases the aggregate demand.
TipAll of the points listed above from both policies increase consumer spending and business investments, leading to a shift in the AD to the right.
When discussing the points (given in this topic) in the evaluation section of a question, the final remark should highlight the shift in spending or investments.
NoteDon't focus solely on long-term supply effects - supply-side policies create immediate demand-side impacts that are crucial for policy evaluation.
