What type of policy is designed to affect the potential output of an economy?

Supply-side policy is designed to affect the potential output of an economy by focusing on improving the production capacity and efficiency of the economy. This type of policy typically includes measures that enhance the factors of production, such as labor, capital, and technology. By lowering taxes, reducing regulatory burdens, or investing in education and infrastructure, supply-side policies aim to increase productivity, thus expanding the economy's potential output over the long term.

In contrast, demand-side policies primarily address the overall demand in the economy rather than its capacity to produce goods and services. While monetary and regulatory policies can impact the economy, they do so in more specific contexts, such as managing inflation or addressing market failures, rather than directly influencing potential output through the enhancement of supply conditions.