Unit 5 and 6

Chapter 5 and 6

5-7-16

Short Run Aggregate Supply- In macroeconomics this is the period in which wages (and other input prices) remain fixed as price level increases or decreases.

Long Run Aggregate Supply- period of time in which wages have become fully responsive to changes in price level, tt is vertical at full employment.

Effects over Short- Run- In the short run, price level changes allow for companies to exceed normal outputs and hire more workers because profits are increasing while wages remain constant. In the long run, wages will adjust to the price level and previous output levels will adjust accordingly.

Equilibrium in the Extended Model- The Long AS Curve is represented with a vertical line @ full employment level of real GDP.

Demand Pull Inflation in the AS Model

-Demand-Pull-Prices increase based on increase in aggregate demand

-In the short run, demand pull will drive up prices, and increase production

-In the long run, increase in aggregate demand will eventually return to previous levels

Cost Push and the Extended Model- Cost-Push arises from factors that will increase per unit costs such as increase in the price of a key resource.

Dilemma for the Government

-In an effort to fight cost-push, the government can react in two different ways.

-Action such as spending by the Government could begin an inflationary spiral.

-No action however could lead to recession by keeping production and employment levels declining.

What term describes describes the effect of businesses borrowing at the same time the fed gov is borrowing?

Crowding Out

Supply Side Economics - Ergonomics

It changes AS and not AD

It determines the level of inflation, unemployment rates, and economic growth

Supply side Economists support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as unemployment compensation or welfare programs provide disincentives to work, save, innovate and undertake entrepreneurial ventures

Lower marginal tax rates induce more work thus causing AS to increase

Lower marginal tax rates also make leisure more expensive and work more attractive

Incentive to save and Invest

1. High Marginal Tax Rates reduce the rewards for savings and investment
2. Consumption might increase but investment depends upon savings
3. Lower Marginal Tax Rates encourage saving and investment

Laffer Curve- There is a theoretical relationship between tax rates and government revenue, as tax rates increase from zero government revenues increase from zero to some maximum level and then decline.

*opportunity cost

Break Off Point money flees(not created), you can either spend or save

3 Criticism of the Laffer Curve

1. Research suggests that the impact of tax rates on incentives to work, save, and invest are small
2. Tax  cuts also increase demand which fuels inflation and demand may exceed supply
3. Where the economy is actually located on the curve is difficult to determineUnit 6 was give to us at her blog at:                                                 https://apmacro.wordpress.com/2016/04/11/unit-6-notes-3/