Supply side economics.

The purpose of supply side policies is to lower the rate of inflation and reducing price levels while still increasing the real GDP. Supply side policies are policies made by the government aimed at increasing aggregate supply. The government may introduce various types of policies that aim to increase the quantity and quality of labour and of capital.

Many such policies focus upon incentives for the companies. For example a government may give a company a reduction in tax. A government may do this if they believe that the company will either invest in capital or labour. With the money saved from taxes a company has many options, they can hire more people or train their current staff. Both these methods will increase the productivity of the company. Another way a company can increase production is to invest in capital (machinery and technology). An example of this is if the Canadian government gave Ford a tax break.

Punch cartoon (1907); illustrates the unpopularity...

Income Tax

Earned Income Tax Credit

Ford in turn would probably invest in their machinery and make it more effective and perhaps train their workers. Both of these things would in turn shift the AS to the right, as in the diagram. This therefore lowers the price level and increases real GDP.

Another supply side policy is the reduction of income tax. This raises the opportunity cost of not working. This is because if the person would earn a greater percentage of what his wage is compared to before with a higher income tax. This is another incentive based supply side policy. It encourages workers to work more as they will earn more money. For example, if a person is earning 20 000 $ and his original income tax is 40 % but reduced to 20%, this person will make an extra 4 000 $. This person...