But these policies are no good in times of severe recession, or depression. If an economy is currently at a level of demand represented by AD1 (price P1, real output Y1), the increase in the possible full employment level of real output from YFE1 to YFE2 is of no significance. The price level and real income level both stay the same. This is also true for the level of demand represented by AD2. If the economy has a level of demand represented by AD3, or even AD4, then the supply side polices will be useful (similar to the classical diagram above), and Keynesians would admit this fact, but in times of depression, they argue, supply side policies are of no use. In fact, they could make things worse. Reducing unemployment benefit at a time when unemployed workers simply cannot get a job due to the lack of demand in the economy will make their plight even worse. Also, they themselves will have less money to spend, thus accentuating the problem of lack of demand.
Supply side policy includes any policy that improves an economy’s and its ability to produce. There are several individual actions that a government can take to improve supply-side performance.
Supply Side economics is the branch of economics that considers how to improve the productive capacity of the economy. It tends to be associated with Monetarist, free market economics. These economists tend to emphasise the benefits of making markets, such as labour markets more flexible. However, some supply side policies can involve government intervention to overcome market failure