Unit 5 Notes - Phillips Curve, Supply-Side Economics, and The Laffer Curve

Phillips Curve (Refer to Notes Sheet)

Disinflation – A reduction in the inflation rate from year to year, which can be seen in the long run Phillips Curve

·      Also occurs when aggregate demand declines

Deflation – A general decline in the price level

Hyperinflation – When an economy experiences an unusual high rate of inflation

- Supply Side Economics

·      Changes in AS, not AD

·      Determines the level of inflation, unemployment rate, and economic growth

·      Also known as Reagonomics (The Trickle Down Effect – Poor gets money last)

·      Lower taxes and decrease regulation

·      Lower tax rates provide positive work incentives and thus shift the AS curve to the right

The Laffer Curve

·      Depicts a theoretical relationship between tax rates and government revenue

·      As tax rates increase from zero, tax revenues (government revenues) increase from zero to some maximum level and then decline

·      3 Criticisms about the Laffer Curve

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

2.     Tax cuts also increase demand which can fuel inflation

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