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.

Unit 5 - April 2

Supply Shock - rapid and significant increase in resource prices, which cause the SRAS to shift which results in producing a shift in the SRPC curve.

• Examples
• Oil embargo.
• Increase in input prices.
• Wages heights
• Could be positive or negative, depending on what it is.
• Could lead to stagflation - simultaneous increase in inflation and unemployment.

Disinflation - reduction in inflation rate from year to year, which can be seen in the LRPC.

Unit 5 - April 1 (Phillip Curve)

The Phillips Curve - deals with inflation and unemployment. 

3 Generalizations of Inflation and Unemployment.

1. Inverse relationship.
2. AS Shocks can cause both higher rates of inflation and rates of unemployment.
3. There is no significant trade off between the two in the long run

If inflation persists and the expected rate of inflation rises, then the entire SRPC move upward (Stagflation possibility or probable).

If inflation expectation drops due to new technology, then new SRPC moves downward. 

Movements of Short Run Phillips Curve (SRPC)

• Increase in AD (C, Ig, G, Xn) - Up/Left along the SRPC. 
• Decrease in AD - Down/Right along the SRPC. 
• Increase in AS - SRPC moves Left (<---). 
• Decrease in AS - SRPC moves Right (--->). 

Long Run Phillips Curve (LRPC) - vertical at full employment (Natural Rate of Unemployment - seasonal, frictional, and structural).

• Major Assumption : More workers benefit creates higher natural rate of unemployment. Fewer workers benefit creates lower natural rate of unemployment.
• Example - Jobs that pays less = More stable people.
• Shifts - same as LRAS (technological advances).

Misery Index - combination of inflation and unemployment in any given year.

• Single digit misery - Good.
• Example - Unemployment rate = 4% ~ 5% 

Unit 5 - Mar 31

Short Run AS - time too short for wages to adjust to the price level. Reason being workers may not be aware of the changes in their real wages due to inflation. Therefore they adjust their labor decisions accordingly as well as wage demand.

Nominal Wages - the amount of money received per hour, per day, per week.
 *People brings home real wages, which is adjusted with inflation, not nominal wages.

Long Run AS - time long enough for wages to adjust to the price level.

• Key Assumptions
• Wages in price - Flexible.
• Changes in wage and price - Offset each other.
• LRAS is represented by a vertical line.
• Shifts in LRAS - Same as PPG (left = technological advances).