Unit 5

Phillips Curve - Represents the relationship between unemployment and inflation. The trade off between inflation and unemployment only occurs in the short run.

Long Run Phillips curve occurs at the natural rate of unemployment. If the natural rate of unemployment changes, then the Long Run Phillip's curve changes. It is represented by a vertical line. There is no trade off between unemployment and inflation in the long run. That means the economy produces at a full employment level. LRPC will only shift if the LRAS curve shifts, otherwise it is assumed to be stable. 

NRU = seasonal, frictional, and structural

The major LRPC assumption is that more worker benefits create high natural rates and fewer worker benefits create lower natural rates. 

Short Run Phillips Curve - there is an inverse relationship between inflation and unemployment. It has a relevance to Okun's law. Since wages are sticky, inflation changes, moves the points on the SRPC. If inflation persists and the expected rate of inflation rise, then the entire SRPC moves upward, which causes stagflation. If inflation expectation drops due to new technology or economic growth, then the SRPC will move downward. Aggregate supply shocks can cause both higher rates of inflation and higher rates of unemployment. Supply shocks are rapid and significant increases in resource cost

The misery index - combination of unemployment and inflation in any given year. Single digit misery is good.

Supply side economics - the belief that the AS curve will determine levels of inflation unemployment and economic growth. To increase the economy, the AS curve should shift to the right, which will always benefit the company first. Supply side economists focus of marginal tax rates.

Marginal tax rates - amount paid on the last dollar earned or on each additional dollar earned. By reducing the marginal tax rate, supply siders believe that you will encourage more people to work longer and forego leisure time for extra income

They support policies that promote GDP growth by arguing that the high marginal tax rate along with the current system of transfer payments. they provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures

Reganomics - lowered the marginal tax rate to get the US out of a recession which lead to a recession.

Ladder curve - a trade off between tax rates and government revenue. It is used to support the supply side argument.

3 criticism of the Laffer Curve

1. Research suggests that the impact of tax rates on incentives to work, save, and invest are small

2. Tax cuts increase demands, which can fuel inflation and causes demand to exceed supply. 

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