UNIT V AND VI

• When changes occur in the short run, they result in either increased or decrease producer profits- not changes in wages paid
• In the long run, increased AD results in a higher price level, as in the short run, but as workers demand more money, the AS curve shifts left to equate production at the original output level, but now at a higher price
• In the long run, the AS curve is vertical at the natural rate of unemployment (NRU), or full employment level of output (FE). Everyone who wants a job has one and no one is enticed into or out of the market
• Demand-pull inflation will result when an increase in demand shifts the AD curve to the right temporarily while raising prices
• Cost push inflation results when an increase in input costs that shifts the AS curve to the left. In this case, the price level increase is not in response to the increase in AD, but instead the cause of PL increasing

Phillips' Curve

• Represents the relationship between unemployment and inflation
• the tradeoff between unemployment and inflation occurs over the short run
• Each point on the curve corresponds to a different level of output
• LRPC: occurs at NRU, represented by a vertical line. No trade-off in unemployment and inflation in long run
• The economy produces at FE output level
• Nominal wages of workers fully incorporate any changes in PL as wages adjust to inflation over  long run
• LRPC only shifts if the LRAS shifts
• same determinants
• increases in Un, LRPC ->
• Un decrease, LRPC <-
• SRPC:
• AD increase, SRPC up and left along curve
• AD decrease, SRPC down and right along curve
• SRAS ->, SRPC <-
• inflationary expectations  decrease, input prices decrease, productivity increase, business taxes decrease, deregulation
• SRAS <- , SRPC ->
• Supply shock: a rapid and significant increase in resource cost which causes SRAS to shift
• NRU= frictional + structural+ seasonal
• the natural rates and fewer worker benefits create a lower NRU
• Misery index: combination of inflation and unemployment in any given year
• single digit is good
• If inflation rate persists and expected rate of inflation rise, then the entire SRPC moves upward

• stagflation exists
• If inflation expectations drop, SRPC moves downward
• New technology, efficiency 
• Stagflation: high unemployment and high inflation at the same time

• Disinflation: when inflation decreases over time
• nominal wages increase
• Business profits fall as prices rise
• firms reduce employment

Laffer Curve

• Trade-off between tax rates and government revenue
• as tax rates increase from 0, tax revenue increase from O to some maximum level, then feclines
• The higher the rate you set, the less money collected
• controversial and debatable
• Criticisms
• where the economy is located on the curve is difficult to determine
• tax cuts also increase demand, which can fuel inflation
• empirical evidence suggests that impact of tax rates on incentives to work, save, and invest are small

Supply Side Economics

Political Cartoon showing the "Trickle Down Effect"

• Support policies that promote GDP growth by arguing that high marginal tax rates along with system of transfer payments (unemployment compensation and SS) provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures
• believes AS curve will determine unemployment and economic growth, inflation
• trickle down effect
• goes from rich to poor
• Marginal tax rate: amount paid on last dollar earned or on each additional dollar earned
• if you reduce this rate, more people will be inclined to work longer, thus forgoing leisure time for extra income