Unit 5

3/31
-Short run:timed to short for wages to adjust to the price level

• Rationale: workers may not be aware of changes in their real wages due to inflation, and having adjusted their labor supply decisions in wage demands accordingly

-Nominal wage: amount of money received per hour, per day, per year

-Long Run AS : time long enough for wages to adjust to the price level

• Key Assumption :
• Represented by a vertical line 
• Wages/ price flexible
• Changes in wages/ price offset each other
• technology, economic growth

4/1
- Phillips Curve: represents the relationship between inflation and unemployment
- Three assumptions

1. Short run trade off between rate of inflation, and rate of unemployment (inverse)
2. Aggregate supply shocks can cause both higher rates of inflation and higher rates of unemployment (SRPC shifts to right or outward)
3. NO significant trade off between inflation and unemployment in the long run

*If inflation persists and expected rate or inflation rises the entire SRPC shifts upwards (Stagflation is possible)
*If inflation expectations drop due to new technology, then SRPC moves downwards
- Increase in AD = up/left movement along SRPC
- Decrease in AD = down/right movement

4/2
- Disinflation : decrease in inflation from year to year, can be seen in LRPC
- Long Run Phillips Curve

• Represented by vertical line
• Only shifts if the LRAS shifts
• Because it exists at natural rate of unemployment, structural changes in economy that affect unemployment will also cause LRPC to shift
• Increase in unemployment will shift LRPC to the right
• Decrease in unemployment will shift LRPC to left

-Misery Index : combo of inflation and unemployment in any given year
*single digit misery is good

4/2
- Supply Shock Economics : rapid/ significant increases in resource cost, which causes SRAS curve to shift and will produce a corresponding shift in SRPC curve
        Example: Causes: Wage Hikes
- Stagflation : simultaneous increase in inflation and unemployment

4/3
- Supply Side Economics A.K.A regonomics

• tend to believe that the AS curve will determine levels of inflation, unemployment, and economic growth
• increase economy : AS curve would go to the right
• Supports policies that promote GDP growth, by arguing the high marginal tax rates, along with current system of transfer payments 
• marginal tax rate: amount of tax paid on additional dollr of income 

-Laffer Curve

• Tax revenues from 0 to some maximum level , and then decline
• Lower tax rates, could lead to an expansion of output and income by increasing AS and enlarging the tax base

*Three Criticisms of Laffer Curve

• Where economy is actually located on curve is difficult to determine
• Tax cuts also increase demand which can fuel inflation and demand may exceed supply
• Tax rates on incentives to work save and invest are small