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Economics A-Level Supply side Policies Essay 25/25
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Edexcel A A-Level Economics essay on Supply Side Policies achieving 25/25 marked by a qualified examiner
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Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introducedin Indonesia (25)
Supply-side policies are policies enacted by the government in the hope of increasing the overall output of the economy.
These involve interventionist supply side policies, in which the government intervenes in a market to affect the supply
side of the economy, often to increase potential output and achieve long term economic growth. On the other hand,
market-based supply side policies incentivise private decision makers to increase output and grow by allowing them to
resolve their own problems.
The likely microeconomic consequences of the supply side policies is an increase in profit for firms in indonesia. We are
told that one of the supply side policies imposed by the government is to reduce tax, with ‘most workers pay[ing] little
or no tax’. The result of this decrease in income tax is that consumers will have more disposable income (C+S=Y)
meaning that they can now spend more on certain goods.This means that the demand for certain goods such as luxury
goods may increase as people can now afford them more easily. For example, the car market in Indonesia would
experience an outward shift in demand, leading to increased profits for the firm seen by the area ABCD. These
increased profits could then be used to reinvest into the business, improving the products quality or and allowing for
organic growth, increasing the scale of the business and even allowing it to compete abroad. Furthermore, this decrease
in tax rates could also encourage large TNCs from other countries to operate in Indonesia which would encourage FDI
into the economy and lead to economic growth as investment is a component of Aggregate demand which would
increase. The lower tax rates could also incentivise new firms to open as they now have larger profit margins.
However, this reduction in tax does not necessarily cause increased profits for firms in Indonesia. Firstly, it depends on
the reduction in taxation as a 2% reduction per tax bracket may have little impact on the economy. Furthermore, we are
told that ‘large companies are often squeezed for taxation’. This means that it is unlikely for TNCs to situate
themselves in Indonesia as they may be targeted for tax revenue. If the economy is in a recession, a decrease in tax may
not actually increase spending as consumers may be suffering from the negative wealth effect or the markets which
benefit from the tax cuts may have income elastic demand and may offer normal or luxury goods so demand for these
firms will not increase despite tax reductions as consumers’ incomes decrease. Finally, a decrease in tax will result in a
worsening of the budget deficit and debt which already stands at 26% of GDP. The consequences of this worsening
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