SECTION F- APO GROUP 2

Macroeconomic Policies
and Principles
Group project based on -
World’s Economy Needs a Supply-Side Revolution Analysis by Allison Schrager |
Bloomberg October 6, 2022, at 6:00 a.m. EDT

Submitted by-
Shefali Malhotra (220101104)
Vishesh Mehra (220101140)
Sakshi Anand (220101154)
Jasneet Singh Baid (220103081)
Tanishk Gangrade (220103091)
Sarthak Khosla (220103158)
Saket Khandal (220201097)
1) “Attempts to boost demand in 2020 and 2021 were met with inflation”. Explain why
this could have happened.

Inflation is a general rise in the price of goods in an economy. The primary focus in the UK
and Europe was on the demand-pull economy. Manufacturers began to reduce output once
the pandemic began because they anticipated that earnings and expenditure would decline in
the manner that they generally do during a recession. The exact opposite took place. Due to
the generous government support, income increased, and households began spending more on
commodities since they had extra money to spend. However, the typical consumer services
that people would purchase, such travel and other leisure activities, were generally
unavailable.

As a result, there was a demand-pull inflationary situation with high demand and little supply.
The term demand-pull inflation usually describes a widespread phenomenon. That is,
demand-pull inflation occurs when consumer demand exceeds the supply of a variety of
consumer products, resulting in an increase in the general cost of living.
Demand-pull inflation, sometimes known as "too many dollars chasing too few goods,"
occurs when there is upward pressure on prices as a result of supply shortages; it can also
result from an increase in aggregate demand.

The implications of an imbalance in overall supply and demand are described by the
Keynesian economic principle known as "demand-pull inflation." Prices rise when the
aggregate supply and demand in an economy are significantly out of balance. The most
typical reason for inflation is this.

The vendors were unprepared for the rise in customer demand, especially for electronics. The
pandemic has revealed that many businesses are not completely cognizant of how susceptible
their supply chain connections are to global shocks. Semiconductors, an offshore-produced
component, are in short supply. Prices will eventually rise because of a component shortage
and rising demand for the products that use those components.
Now what the governments can do is incentivise the increase in supply of goods by removing
restrictions. This will lead to an increase in supply which will meet the extra demand that is
there because of expansionary fiscal policies.

2) What are the two the best ways to boost supply, according to the article? Explain
what the merits and demerits of these two approaches are.

The rise in inflation due to the high amount of expenditure to increase the aggregate demand
without increasing the supply side led to high inflation so the policies have to change up and
start focusing more on the supply-side policies which means there will was a return to the
free-lunch thinking. These policies previously were not given due attention and were outright
mocked. These policies mean that more stuff and productivity and cheaper housing and all
that abundance will lower inflation.

There are two methods or policies according to the article which can be used to boost the
supply side and there is a disagreement on which is the best way. We will further discuss the
merits and demerits of the two policies.

Industrial Policy
Industrial policy is when the government chooses attractive industries and provides them with
tax breaks and other financial aid to boost output. Liberals have a stronger preference for
industrial policy. The idea that it is preferable for the government to decide where resources
are allocated rather than individual initiative, from creating firms and enabling markets to
guide their own investment, is what makes this situation different.

The government's strategy makes sense if you believe that markets misallocate money or
when the economy requires initiatives that demand so large fixed investments that the
government must take the initiative. The Biden administration has mostly been pursuing this
more-government approach, which describes many of the provisions in the Build Back Better
bill.
Merits of this policy is that it has targeted those industries where investments is important
and if there is no private investments in those parts the government can put in money.
Facilities and infrastructure being the prime examples as this is what facilitates growth. When
a project is well-executed and there is a clear need for it, as with Operation Warp Speed for
the Covid vaccinations or the Manhattan Project to create nuclear weapons, government
investment can be effective. Infrastructure spending can also accelerate growth if it picks the
right projects.

Demerits are that the Industrial policy does not have a great track record of picking winners
— it’s hard when there is so much uncertainty about which innovations will be the big game
changers. This means that it is not known if the government spending will be done in the
right areas and this spending will convert into a boost of the supply side. These are indirect
methods of boosting the output or supply, therefore they take time to translate into growth.

Get-out-of-the-way approach

Traditional conservatives are taking a get-out-of-the-way approach: They want fewer

regulations and lower taxes. This will lead to businesses having more incentive to increase
their supply as there are lower restrictions or barriers in the way.

The difference comes down to whether you believe growth comes better from individual
initiative and from starting businesses and allowing markets to direct their own investment.
There is a reliance on the market in this method which means that if the markets and business
environment is effective this should boost the supply side and lead to a rightward shift of the
supply curve.

Merits of this method is that this would reduce disincentives to work, innovate and start new
businesses with tax cuts and clawing back regulations. Deregulation also has a good track
record if well done. The overall idea is sound to let growth happen from the ground up by
removing economic obstacles and disincentives.

Demerits here are that Tax cuts also largely depend on execution. Tax cuts financed with
deficits are less effective, and the best tax reform removes loopholes and other distortions as
well as lowering rates. The industries or markets may not be receptive to such tax cuts as was
the case in the UK.

3) Which approach is recommended by the author and why? Illustrate this approach
using the familiar AS-AD diagram.

The author of the article is a market-inclined person, so he tends to favour the get-out-of-the-
way approach. He has more faith in individuals and a market that rations risk than he does in
government bureaucrats. Ultimately he thinks that whether the approach will work better
really comes down to how well it’s executed and the problem that it’s trying to solve.
We can see that if there is a lack of involvement by the government, removal of restrictions
and reduction of taxes this will incentivize the businesses to produce more this can be seen by
the rightward shift of the Aggregate Supply Curve (AS). The shift of the supply curve has a
dual effect, and both of these are positive effects as there is a rise in the level of the
equilibrium level of output and also a fall in the price levels, which also means that this will
lower the inflationary pressure on the economy. The rightward shift is due to the innovation
by the firms and increases in productivity as there is more independence for them to function
and experiment.

It is therefore evident that supply-siders like the author, who favour a smaller government
and less interference in the free market, tend to align themselves with traditional
conservatives when it comes to issues of regulatory policy.

This makes sense because supply-siders do not believe that induced demand can either rescue
inflation or have a lasting impact on GDP, even though they may concede that the
government can temporarily help by making purchases and supporting particular industries
by intervening.