UNIT 5
Supply-side economics or Reaganomics:

1. support policies that promote GDP growth by arguing that high marginal tax rates along w/ current system of transfer payments (i.e. unemployment compensation and social security) provide disincentives to work, invest, innovate, and take entrepreneurial adventures
2. believe AS curve will determine levels of inflation, unemployment, and economics growth

Higher the tax rate you set, less $ you will collect
Laffer Curve is controversial and debatable

Criticisms:

1. where economy is located on curve, it is difficult to determine
2. tax cuts also ↑ demand which can fuel inflation
3. empirical evidence suggests that impact on tax rates on incentives to work, save, and invest are small

 

*The Phillips Curve represents the relationship b/t unemployment and inflation
*trade-off b/t unemployment and inflation occurs over SR
*each point on the Phillips Curve corresponds to a different level of output
*LRPC=long run Phillips Curve

• occurs at NRU

• represented by ↨ line

• no trade-off b/t unemployment and inflation in LR

1. economy produces @ FE output level
2. nominal wages of workers fully incorporates any changes in PL as wages adjust to inflation over the LR

*LRPC only shifts when LRAS shifts (both have the same determinants)
*↑ in unemployment, LRPC →
*↓ in unemployment, LRPC ←
*Increase in AD=up/left movement along SRPC 

• C↑, Ig↑, G↑, and/or Xn↑
• AD→: GDPR↑ and PL ↑; u%↓ and π%↑; up/left along SRPC
• this would be depicted in the graph below 

*Decrease in AD=down/right along SRPC

• C↓, Ig↓, G↓, and/or Xn↓
• AD←: GDPR↓ and PL↓; u%↑ and π%↓; down/right along SRPC
• in this case, point B would move to point A in the graph below

Stagflation- persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Deflation- reduction of the general level of prices in an economy.

Disinflation- reduction in the rate of inflation.