Unit 5: Supply Side Economics

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Disinflation: A reduction in the inflation rate from year to year; this can be seen in the LRPC. It also occurs when the aggregate demand falls (year to year)

Deflation: A general decline in the price level

Hyperinflation: Where an economy experiences an unusually high inflation rate

Reaganomics (supply side economics): The trickle down effect-reducing taxes

Stagflation: High inflation and high unemployment

Supply Side Economics: Changes in AD and NOT AD in determining the level of inflation, unemployment rates, and economic growth

  • These economists argue that lower tax rates provide positive work incentives and thus shift the aggregate supply curve right
  • Support programs and policies that promote GDP growth by arguing that high marginal tax rates, along with the current system of transfer payments (unemployment compensation, welfare programs, etc), provide disincentives to work, invest, and to undertake entrepreneurial ventures
Laffer Curve: Depicts a theoretical relationship between tax rates and tax revenues, as tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline. 

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

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