Unit V & VI

INTRO:
So while everyone else is freaking out whether or not to do the blog or not, I'm just gonna go ahead and post mine up. To be honest, this unit is not even that long, so no big.

FROM SHORT RUN TO LONG RUN:

Short Run:

• AS curve doesn't shift in response to changes in the AD curve in the short run.
• i.e. Nominal wages do not respond to price level changes
• Workers may not realize impact of the changes in may be under contract.

Long Run

• period in which nominal are fully responsive to previous changes in price level.
• When changes occur in the short run they result in either increased or decreased producer profits- not changes in wages paid.
• In the long run increases in AD result in a higher price level, as in the short run, but as workers demand more money the AS curve shifts left to equate production at the original output level, but now at a higher price.
• In the long run, the AS curve is vertical at the natural rate of unemployment (NRU), or full employment (FE) level of output. Everyone who wants a job has one and no one is enticed into or out of the market.

Demand-Pull Inflation

• will result when an increase in demand shifts the AD curve to the right temporarily increasing output

Cost-Push Inflation

• when an increase in input costs that shifts the AS curve to the left. In this case the price level increase is not in response to the increase in AD, but instead the cause of price level increasing.

PHILLIP'S CURVE

• represents the relationship between unemployment and inflation
• the tradeoff between inflation and unemployment only occurs in the short rune.
• Each point on the curve corresponds to a different level of output

THE LONG RUN PHILLIPS CURVE (LRPC)

• occurs in the natural rate of unemployment.
• represented by a vertical line.
• there is no tradeoff between unemployment and inflation in the long run.
• the economy produces at the full unemployment output level
• the nominal wages of workers fully incorporate any changes in price level as wages adjust to inflation over the long run
• LRPC will only shift if LRAS shifts.
• Increases in NRU will shift LRPC ->
• Decreases in NRU will shift LRPC <-
• If the natural rate of unemployment changes the LRPC moves
• 3 types of NRU move
• Frictional
• Structural
• Seasonal

THE SHORT RUN PHILLIPS CURVE (SRPC)

• Assumed to be stable in the short run, because the SRAS is stable.
• increases AD = Up/Left movement along SRPC
• decrease in AD= down/right along SRPC
• SRAS -> = SRPC <-
• SRAS <- = SRPC -> 

OTHER THINGS

Supply Shocks

• Rapid/significant increases in resource cost, which causes the SRAS curve to shift thus producing a corresponding shift in the short run Philip's Curve (SRPC)

Misery Index

• A combination of inflation and unemployment in any given year; Single Digit Misery is good.

Understanding Stagflation

• High unemployment and high inflation at the same time

Disinflation

• When inflation decreases over time.

Supply Side Economics/Reaganomics

• support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments such as unemployment and social security payments provide disincentives to work, invest, innovate, and undertake entrepreneurial ventures.

Marginal Tax Rates

• the amount paid on last dollar earned or each additional dollar earned.
• By reducing the marginal tax rate, supply siders believe that you will encourage more people to work longer foregoing leisure time for extra income

Laffer Curve

• tradeoffs between tax rates and tax revenues.
• Criticisms of the Curve
• where the economy is actually located on the curve is difficult to determine.
• tax cuts also increase demand which can fuel inflation
• empirical evidence suggest that the impact of tax rates on incentives to work and invest and save are small.