Macroeconomic policies that can affect both AD & AS:
(1) Level of taxation. When UK government reduces tax rates, working individuals will have higher disposable income. As a result more money can be spent into the economy. Increase in consumption (C) will lead to an increase in AD.
From supply side, lower income tax rates can encourage an individual to work harder. An increase in productivity, will lead to more output being produced & at lower costs. This leads to AS moving rightward
(2) Investment. As firms increase their investment onto R&D, capital goods, factories etc AD will shift to right. In long run, this means an increase in productive capacity of the economy e.g. more machinery to produce goods, discovery of more efficient method of production etc. This will shift AS rightward
(3) Education spending. By building more schools, universities & giving more grants for varsities to conduct research means an increase in government expenditure. Increase in G leads to increase in AD
In long run, UK economy will experience a rightward shift of AS curve. This is because we have more productive workforce that can lead to increase in production
(4). Health spending. This is another area where UK government has spent heavily on top of education. Increase in government expenditure on building new number of hospitals means AD will increase
However, in long run, due to an increase in accessibility of healthcare, UK will generally have a healthier workforce. This will reduce number of days being absent from work due to illness etc. Productivity will increase & more work can be done. AS shifts right
(5) Infrastructure spending. Equally, more allocation to upgrade public transports, build more roads etc is a form of government spending. Increase in G leads to an increase in AD.
In long run, having a more efficient transportation network such as less congestion may also result in greater productivity. Fewer hours are being spent on the road & more time can be allocated onto production of goods
Tuesday, September 2, 2008
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