Unit 5 - April 3

Supply Side Economics / Reaganomics - tends to believe that the AS curve will determine level of inflation, unemployment, and economic growth.

• To increase economy - AS shifts right.
• Companies benefit - AS.
• Consumers benefit - AD.
• Focus on the marginal tax rate - amount of tax paid on additional dollar of income.
• By reducing the marginal tax rate, it will encourage more people to work longer.
• High marginal tax rate reduces saving because saving money taxed at a higher rate on profit/interest.

Laffer Curve 

• Tax Rates and Government Revenue have an inverse or a trade off relationship.
• High tax rate = Low government revenue.
• There is a U-shaped, because it always tries to maximizes government revenue.
• As tax rate increase from 0, tax revenue increases from 0 to some maximum number then they decline.

3 Criticisms of the Laffer Curve

1. Where the economy is located on the curve is difficult to determine.
2. Tax cuts also increase demand, which can fuel inflation and demand may exceed supply.
3. Research state that tax rate impact people's incentive to work, invest, and save.