Laffer Curve

Manipulating AS by enacting policies to stimulate incentives to work, save, and invest

• Tax cuts to increase disposable income
• Hard to enact policy because disincentive, people take advantage of welfare

Laffer Curve: Displays theoretical relationships between tax cuts and government revenue.

• Criticisms of the Laffer Curve
• Empirical evidence suggests that the impact of tax rates on incentives to work, save, and invest, are small
• Tax cuts can also increase demand which can fuel inflation
• Where the economy is actually located on the curve is difficult to determine

The Different "tions" of Economic

Inflation: When price levels increase

Deflation: When price levels decrease

Disinflation: The rate of inflation decreases

Hyperinflation: Monetary inflation occurring at a high rate 

Short-Run Phillips Curve & Stagflation

If inflation persists, and the expected rate of inflation rises, then the entire SRPC moves upwards

Stagflation: Simultaneous rise in inflation and unemployment

Supply Shocks (Adverse Supply Shocks): Rapid and significant increase in resource cost, which causes the SRAS to shift

• Depreciation of a Dollar
• Oil Embargo
• Rapid increase in price of gas

• If inflation expectations drop due to new technology, then SRPC will move downward

LRPC: Natural Rate of Unemployment= Frictional, Seasonal, and Structural Unemployment

Missing Index

• A combination of inflation and unemployment in any given year. 
• Single digit misery is good

The Phillips Curve

In the Short Run

• The Phillips Curve represents a trade-off between inflation and unemployment.
• Inverse Relationship
• Inflation Up, Unemployment Down
• Each point on the Phillips Curve corresponds to a different level of output. 

The Long Run Phillips Curve

• Occurs at the natural rate of unemployment
• Represented by a vertical line
• No trade-off between inflation and unemployment
• Economy produces at the full employment output level
• The LRPC will only shift if the LRAS curve shifts
• Increases in unemployment LRPC ---->
• Decreases in unemployment LRPC <---
• Structural changes in the economy that affect unemployment will also cause the LRPC to shift 

Monetary Policy Assignment

Loanable Funds Market

• The private sector supply and demand of loans 
• This market brings together those who want to lend money (savers) and those who want to borrow (firms with investment spending projects) 
• This market shows the effect on REAL INTEREST RATE 
• Demand- Inverse relationship between real interest rate and quantity loans demanded 
• Supply - Direct relationship between real interest rate and quantity loans supplied 
• This in NOT the same as the money market (supply is not vertical)
• Prime Rate -Intrest rate that banks charge their most credit worth customers