Unit 5 & 6: 04/07/2015

Inverse relationship between unemployment and inflation?
-Short run Philips curve
Graph of long run aggregate supply curve looks?
-Vertical at full employment
What type of inflation caused by adverse supply shock?
-Cost push inflation
Hypothetical economy '03-'06 inflation dec 8% ->  6% -> 3%
-Disinflation
knowledge and skills that make a worker productive
-Human capital
High inflation and high unemployment
-Stagflation

Supply side economics
-Belief that the AS curve will determine levels of inflation, unemployment, and economic gorwth
-To increase the economy the AS curve will have to shift to the right which would benefit the company first.
-Supply side economists focus on marginal tax rates.

Marginal tax rates: amount paid on the last dollar earned or the additional dollar earned.

Lower taxes are incentives for workers to invests in our economy

1.Supply side economists
-Supports policies that promote GDP growth by arguing that high marginal tax rate along with our current system of such unemployment.
-People to increase savings and therefore create lower interest rates and increase business investments.
-Provide disincentives to work, invest, innovate, and undertake entrepreneur ventures.

2. Supply side economics (Raeganomics)
-Lowered the marginal tax rate to get the U.S not in a recession ---> Deficit

Laffer curve
it is a trade off between tax rates and government
It is used to support the supply side economics.

As tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline,

The higher the tax rates you set the less money you will collect and the laffer curve id controversial and debatable.

Criticism of the laffer curve...
1. researchers suggest that the impact on tax rates on incentives to work, invest, and to save are small.
2.tax cuts also increase demands

3. where the economy is actually located on the curve is yet to be located on the curve is yet to be determined,