Unit V

SRAS

• Time too short for wages to adjust to price level
• Workers may not be aware of changes in their real wages due to inflation, therefore they have adjusted their labor supply decisions and wage demands accordingly
• Nominal wages: the amount our money received per hour, per day, or year

	Price Level	Wage Level	Employment Level	Implications
Keynsian or Horizontal	Fixed	Fixed	Flexible	Output depends on change in supply
Intermediate	Flexible	Fixed	Flexible	Output depends on change in price level and employment level
Vertical or Classical	Flexible	Fixed	Fixed	Output depends on change in price level

LRAS

• Time long enough for wages to adjust to price level
• Key Assumptions

1. Wages and prices are flexible
2. Changes in wages and price off set one another
3. Represented by a vertical line

• Demand Pull Inflation

• Economic Growth

• Cost Push Inflation

• Recession

Phillip's Curve

• There is an inverse relationship between inflation and unemployment
• If inflation persist and the expected rate of inflation rises, then the entire SRPC moves upward (stagflation is possible)
• If the inflation expectations drop such as
• technology then the SRPC will move downward
• Decrease in AD= down/right along SRPC
• SRAS shifts to the right=SRPC shifts to the left (disinflation)
• SRAS shifts to the left=SRPC shifts to the right (stagflation)

LRPC

• Only affected by unemployment  (seasonal, frictional, structural)
• The major LRPC assumption is that more worker benefits create higher natural rates, and fewer worker benefits create fewer natural rates of unemployment
• Unemployment rises, LRPC shifts right
• Unemployment lowers, LRPC shifts left
• Misery Index: combination of inflation and unemployment in a given year, single digit misery is good

Supply Shock

• It is a rapid and significant increase in resource prices, which causes SRAS to shift while producing a corresponding sifts in the SPRC
• Examples:

1. Increase wages
2. Oil embargo
3. Depreciation of the U.S. dollar

Stagflation

• Where there is a simultaneous increase in inflation and unemployment

Disinflation

• When inflation decreases

Supply-side Economics (Reaganomics) 

• Tend to believe that the AS curve will determine levels of inflation, unemployment,and economic growth
• Also supports policies that promote GDP growth by arguing that high marginal tax rates alone current system if transfer payments unemployment, social security, welfare)
• They provide disincentives to work, invest, innovate, and undertake entrepreneur ventures

Marginal Tax Rate

• Amount of tax paid on an additional dollar of income, changes from year to year

Laffer Curve 

• As tax rates increase from 0, tax revenues increase from 0 to maximum level then decline
• Tax revenue=government revenue
• Tax rates above or ideal rate will decrease tax revenue

Three Criticisms

1. Where the economy is located on the Laffer Curve is difficult to determine
2. Tax cuts increase demand which confule inflation, therefore demand may exceed supply
3. The impact of tax rates on incentives to work, save, invest are small

Here is a video on the Phillip's Curve if you have any more questions!