April 24, 2017 - Phillips Curve/Laffer Curve
10:53 PM
In the short run: the Phillips curve represents a trade-off between inflation and unemployment
- As inflation increases, unemployment decreases
Each point on the Phillips Curve corresponds to a different level of output.
Long run Phillips curve:
- it occurs on the natural rate of unemployment,
- it is represented by a vertical line.
- There is no tradeoff between inflation and unemployment
- the economy produces at a full ouput level
- The LRPC (Long run phillips curve) will only shift if the LRAS curve shifts.
- Increases in unemployment, it will shift LRPC ->
- Decreases in unemployment, it will shift LRPC
Supply side Economics/ Reaganomics: to stimulate active policy, to stimulate , to work save and invest
includes tax cuts, which increases disposable income
Laffer curve: it displays the theoretical relationship between tax rates and government revenue
Criticisms of the Laffer Curve:
includes tax cuts, which increases disposable income
Laffer curve: it displays the theoretical relationship between tax rates 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 also increase demand which can fuel inflation
- Where the economy is actually located on the curve is difficult to determine
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