Unit 5 and 6

• When changes occurs in the short run they result in either increased or decreased producer profits not changes in wages paid
• In the long run, increases in 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 or full employment level of output. Everyone who wants a job has one and noone is entered into or out of the market.
• Demand-pull inflation will result when an increase in demand shifts the AD curve to the right, temporarily increasing output 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 increases is not in response to the increase in AD but instead the case of price level increasing.

Philips Curve

• Relationship between the unemployment and inflation
• trade off between inflation and unemployment only occurs in the short run
• each point on the philips curve corresponds to a different level of output

AS curve doesn't shift in response to changes in the AD curve in the short run 

• Nominal wages do not respond to price level changes
• workers may not realize impact if the changes may be under contract

Long run - period in which nominal wages are fully responsive to changes in the price level

Philips Curve

• Occurs at natural rate of unemployment
• represented by a vertical line
• no trade off unemployment and inflation in the LR
• the economy produces at the full employment output level
• the nominal wages of workers fully incorporate any change in price level as wages adjust to inflation over the long-run
• LRPC only shifts if LRAS shifts
• increases in NRU will shift LRPC right
• decreases in NRU will shift LRPC left
• NRU = Seasonal, frictional, structural NOT CYCLICAL

Price level

• Stable in the short run because the SRAS curve is assumed to be stable
• Increase AD - up/left movement along SRPC
• Decrease in AD = down/right movement along SRPC

Supply shock - rapid and significant movement in resource cost which causes the SRAS to shift this producing a corresponding shift in the SRPC curve.

Misery index - combo of inflation and unemployment in any given year

• Single digit misery is good

Stagflation - high unemployment and high inflation at the same time

Disinflation - When inflation decreases over time

Supply side economics- Support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as unemployment and social security payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures. 

SS economist tend to believe that AS curve shifts to the right thus creating the trickle down effect

Marginal tax rates - the amount paid on last dollar earned or on each additional dollar earned.

• by reducing the MTR, ss believe hat you will encourage more people to work longer foregoing leisure for extra income.

Laffer Curve

• The higher the tax rate you set, less money you will collect
• Laffer curve is controversial and debatable

1. Where the economy is actually located on the curve is difficult to determine
2. Tax cuts also increase demand which can fuel inclation
3. Emperial evidence suggest that the impact of tax rates on incentives to work, invest, and save are small.