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It can thus be seen how the interventionist supply-side policies can be used to achieve economic growth. This happens by shifting the LRAS to the right and increasing the productive potential of the economy. These measures can help increase the quantity and quality of the factors of production available in the economy.

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It can thus be seen how the expenditure of the government on infrastructure and the private sector on better technology shifts the LRAS to the right and increases the productive potential of the economy. Such measures by both the private and public sectors help increase the quantity and quality of the factors of production available in the economy.

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4. Explanation of how increased government expenditure in infrastructure will increase productive capacity and shift the LRAS to the right 

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4. Explanation of how increased government expenditure in infrastructure will increase productive capacity and shift the LRAS to the right 

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Infrastructure is a type of physical capital, the result of investment and government expenditure. Building an infrastructure includes power, telecommunications, roads, dams, city transport, and more. Building good quality infrastructure increases production efficiency while lowering costs. For example, good roads can transport more output and lower costs by saving time and effort in transporting goods and services. Therefore, more infrastructure improves labour productivity. As a result, investment in infrastructure and government expenditure increases aggregate demand and increases the potential production which leads to a shift in SRAS and LRAS to the right.

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diagram to show a shift in the LRAS (by chaewon)

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diagram to show a shift in the LRAS (by chaewon)

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As investment in human capital, labour efficiency, and quantity and quality of goods increase, the LRAS curve shifts to the right. This means increasing aggregate demand in the short run and increasing potential output in the long run. This is the new classical model of LRAS shifting to the right as it increases. As LRAS moves, AD naturally moves as well. Aggregate supply is not determined by price level or AD, but rather by the above factors.

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Similarly, an increase in spending on infrastructure by the government will allow for economies of scale to be experienced by businesses and individuals in the private sector. For example, if the government invests in better roads, then the distribution of goods will be easier between business and consumers, and businesses to businesses. This will allow for a more efficient transfer of goods through the different sectors of the economy. As a result, the LRAS will be shifted to the right because there will be a greater quantity and quality of resources in the economy.

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Explanation of how increased government expenditure in infrastructure will increase productive capacity and shift the LRAS to the right 

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Explanation of how increased government expenditure in infrastructure will increase productive capacity and shift the LRAS to the right 

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Infrastructure is a type of physical capital, the result of investment and government expenditure. Building an infrastructure includes power, telecommunications, roads, dams, city transport, and more. Building good quality infrastructure increases production efficiency while lowering costs. For example, good roads can transport more output and lower costs by saving time and effort in transporting goods and services. Therefore, more infrastructure improves labour productivity. As a result, investment in infrastructure and government expenditure increases aggregate demand and increases the potential production which leads to a shift in SRAS and LRAS to the right.

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As investment in human capital, labour efficiency, and quantity and quality of goods increase, the LRAS curve shifts to the right. This means increasing aggregate demand in the short run and increasing potential output in the long run. This is the new classical model of LRAS shifting to the right as it increases. As LRAS moves, AD naturally moves as well. Aggregate supply is not determined by price level or AD, but rather by the above factors.

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Research and development in new technology will improve the quality of physical capital - hence increasing productive capacity and shifting the LRAS to the right. By innovating new technology, there will be a spillover effect into the economy because other related firms can make use of it to make production more efficient. The LRAS depends on the quantity and quality of factors of production, and better physical capital helps increase them. For example, a vehicle manufacturer makes a truck that can hold more inventory or innovates a tractor that can do a variety of things. This means that related industries such as the agriculture industry will benefit. Through the more modern tractors, the farmers are able to maintain their crops more efficiently. This will thus result in an increase in quality and quantity of resources - shifting the LRAS to the right.

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The long-run aggregate supply or LRAS refers to the productive potential of an economy. It can be defined as the output that an economy can produce when using all its factors of production; when operating at full employment. The greater the LRAS (on a graph it is shifted to the right), the greater the potential of the economy - meaning better quality and amount of factors of production.

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An alternative policy to promote economic growth is through the implementation of demand-side policies such as expansionary monetary policy. One problem with interventionist supply-side policies is that it relies heavily on government spending and therefore has a negative effect on the government budget. Expansionary monetary policy has less of an effect on the government budget as it involves the reduction in interest rates through an increase in the supply of money. The reduction in interest rates encourages investment; investment in capital in particular leads to an increase in productive capacity and reduces production costs overtime, increasing SRAS and LRAS. However, this policy may be inflationary and in a period of severe recession where confidence is low, a decrease in interest rates may not be enough of an incentive to stimulate spending.

Another alternative is market-based supply-side policies or expansionary fiscal policy that involve the lowering of personal income tax and corporate tax. Cuts in personal income taxes lead to higher after-tax incomes, creating an incentive for people to provide more work. For example, there may be an increase in the number of people interested in finding work who were previously not interested in working and more workers may decide to increase the number of hours worked per week. Lower taxes on business profits increases the level of after-tax profits meaning that firms have greater financial resources for investment and pursuing technological innovations through more research and development. These tax cuts lead to an increase in productive capacity resulting in greater potential output (rightward shift in LRAS). These do not require government funds to be implemented, which is the opposite for interventionist supply-side policies. However they can reduce tax revenues leading to a budget deficit or increase an existing one. It also may worsen income distribution since it is the wealthy who earn most of the interest income and business profits, so tax cuts will affect wealthy people by increasing their after-tax incomes more than they will affect lower income groups of the population.

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There are positive aspects of interventionist over market-based supply-side policies. We have to understand that not all investment needed for economic growth will be undertaken by the private sector. These goods are also known as merit goods and public goods, which are goods that are mostly underprovided by the market, and these goods have social costs that exceed the social benefit to the individual consumer.

Education and infrastructure are the two main examples that are discussed when talking about interventionist supply-side policies. The promotion of education allows people to be more skilled. This allows people to be more productive and allow firms to produce more output. A better-educated workforce will also have a higher disposable income which will pay taxes, allowing governments to spend money and grow the economy.

Infrastructure, as a public good, is non-excludable, and it cannot be provided by the private sector. Better infrastructure will increase productivity and reduce the cost of production for firms. They will be able to operate more efficiently.

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The main drawback of interventionist supply-side policies is that it will cost the government's annual budget. For example, the provision of education and training is highly labor-intensive and extremely costly, certainly in comparison with changes in interest rates. As a result, there will be a greater amount of expenses for the government - this means that there will be a budget deficit. In the long term, such a continued budget deficit will amount to a high degree of debt for the government. This will cause the public to lose confidence in the economy, and this might decrease AD in the long run. The increase in government debt will also mean that the government will have to find some other sources of revenue; increasing taxes will again deter AD while privatizing might exacerbate the inequality that persists. As a result, there will definitely be a slower increase in GDP in the long-term, when the debt rises to egregious levels.

Moreover, direct intervention by the government may not mean that the needed industries are being helped. Government policies often take time and may be inefficient because of political pressures that are caused by lobbying. For example, if a large firm lobbies for subsidies in investment on small industries that will increase competition (and so innovation), the government will ultimately submit to it. This means that the budget allocated that was supposed to go to small firms that will increase innovation will instead go to the large firms. This will only cause monopolies to become worse - it will instead go against innovation in the economy. As a result, political constraints will cause inefficiencies in the intervention. This means economic growth in the long-run will not be achieved, because monopolies are aided.

Allocative efficiency itself is hard to achieve for the government. It will be difficult for the government to correctly point out which industries that should be invested in, regardless of any political constraints. While it may be simple to just say "education" and "technology," the government needs to specifically point out to which buinsees, to which sector and which part of the industry will be invested. Thus, intervention may not increase economic growth because allocative inefficiency is a large risk.

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Research and development is the process of that companies undertake to innovate and introduce new products and services. It refers to the time where the firm takes time to test and develop products with new/better features. It discovers new technology and increasing capacity of a firm.

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Explain how business spending on research and development and government expenditure on infrastructure might shift the long-run aggregate supply curve.

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Explain how business spending on research and development and government expenditure on infrastructure might shift the long-run aggregate supply curve.

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Economic growth refers to an increase in the production of economic goods and services, compared from one period of time to another. Economic growth is calculated using the increase of prices (or inflation) of the consumer price index.

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Interventionist supply-side policies refer to those where the government will directly intervene in the market to increase the short-run aggregate supply (and also affects the long-run aggregate supply in the future).

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Evaluate the effectiveness of interventionist supply-side policies to achieve economic growth [15]

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Evaluate the effectiveness of interventionist supply-side policies to achieve economic growth [15]