Unit 5

May 5, 2018

Unit 5

Phillips Curve

Natural rate of unemployment: short run and long run intersect

Disinflation: it is a reduction in the inflation rate from year to year

This can be seen in the long run Phillips curve. It also occurs when aggregate demand falls.

Deflation: A general decline in the price level

Hyperinflation: where an economy experiences an unusual high inflation rate.

Supply-side economics (Reagenomics)

-       Change in AS, not AD in determining the level of inflation, unemployment rates and economic growths.

-       Argue that lower tax rates provide positive work incentives in this shift in thus shift the aggregate supply serve to the right

-       Supply- side economist support programs and policy that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments (unemployment compensation, welfare programs, etc.) provide disincentives to work, invest, and to undertake entrepuernual ventures.

Lafer curve

-       It depicts a theoretical relationship between tax rates and tax revenues.

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

-       Criticism:

o   Impericle evidence suggest that the impact of tax rates on incentives to work save and invest are small.

o   Tax cuts also increase demand which can fuel inflation

o   Where the economy is actually located on the lafer curve is difficult to determine.