5.4.1 Meaning of supply-side policy and its effect on LRAS
Definition: Supply-side policy is government measures aimed at increasing the economy's long-run productive capacity, shifting the long-run aggregate supply (LRAS) curve to the right.
Unlike fiscal and monetary policy (which manage AD), supply-side policy targets AS. The economy can produce more at every price level; potential output and the trend growth rate rise (an outward shift of the PPC).
Example: India's PLI scheme, Skill India, the GST reform and investment in digital infrastructure (UPI, Aadhaar) are supply-side policies.
Analysis chain (AO2): Supply-side policy → more or better factors of production → productivity rises → LRAS shifts right → higher real GDP with lower price level pressure.
Evaluation (AO3):
- Supply-side policies take a long time to work and their results are uncertain.
- Some are costly to the government (education, infrastructure) and have opportunity costs.
🔒 Also in the full notes
- 5.4.2 Objectives of supply-side policy
- 5.4.3 Tools of supply-side policy
- 5.4.4 AD/AS analysis of supply-side policy
- Exam practice: 5 practice questions
- 2 exemplar answers with full model answers and mark breakdowns
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