Unit 5: Short Run Phillips Curve and Long Run Phillips Curve

SRPC

• There is an inverse relationship between unemployment and inflation.

LRPC 

• it occurs at the long rate of unemployment
• it is always represented by a vertical line
• there is no trade off between unemployment and inflation
• it will only shift if LRAS shifts
• if the NRU shifts or changes so does the LRPC
• (Natural Rate of Unemployment) Un = Frictional + Seasonal Unemployment (4-5%)
• The major LRPC assumption is that more worker benefits create higher natural rates and a few worker benefits create lower natural rates.

Misery Index 

• Where you have a combination of inflation and unemployment in any given year.
• Single digit misery is good.

Supply Shocks 

• Rapid & significant increase in resource cost, due to many things.

Disinflation

• Long Run Phillips Curve

Deflation

• General decline in prices

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, invest, innovate, and undertake entrepreneur ventures. 

Incentives to save and invest

1. High marginal tax rates reduce the rewards for savements and investment.
2. Consumption might increase but investments depend on savings.
3. Lower marginal tax rates encourage saving and investment.

Laffer Curve 

•  It is a theoretical relationship between tax rates and tax revenues. As tax rates increase from zero to some maximum level and then decline. 

3 criticisms of the Laffer Curve

1. Evidence suggests that the impact of tax rates in incentives to work, save and invest are small.
2. Tax cuts also increase demand which can fuel inflation, and demand may exceed supply.
3. Where the economy is actually located on the curve is difficult to determine.