Unit V

Short run

• timed to short for wages to adjust to the price level.
• workers may not be aware of changes in their real wages into inflation, and having adjusted their labor supply decisions wage demands accordingly.

Nominal wages

• 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 ASSUMPTIONS

• Represented by a vertical line
• Wages in price are flexible
• Changes in wages and price offset each other.
• Technology and economic growth shift the graph.

Phillips Curve

•  Represents the relationship between inflation and unemployment
• There is a short run trade off between the rate of inflation and the rate of unemployment.
• Aggregate supply shocks can cause both higher rates of inflation and higher rate of unemployment.(srpc shifts to the right or outward)
• There is no significant trade off between inflation and unemployment in the long run.
• If inflation persist and the expected rate if inflation rises then the entire SRPC moves upward.( stagflation is possible or probable)
• If inflation expectations drop due to new technology then the SRPC moves downward.
• Increase in AD = up/left movement along SRPC.
• Decrease in AD = down/right along SRPC
• SRAS increase = SRPC decrease
•  Disinflation
•  when unemployment and inflation both go down.
•  Long Run
• Is represent is represented by a vertical line.
• Only shifts if LRAS shifts
• LRAS shifts with technology and economic growth
• When all the way up top it's called Natural rate of unemployment.
• If rate of unemployment changes then the LRPC can change
• Increases in Un will shift LRPC to right
• Decreases in Un will shift LRPC to the left
• Misery index
• Combination of inflation and unemployment in any given year.
• Single digit is good
• Supply shock
• Rapid and significant increases in resource cost which causes SRAS curve to shift and will produce a corresponding shift in the SRPC curve.
• Increase in wages
• Oil embargo
• Increase in input prices
• Stagflation
• Consistent increase in inflation and unemployment.
• Disinflation
• Decrease in inflation from year to year, and can be seen in the LRPC.
• Prices go down and profits go down.
• Supply side economics Or Reagonomics
• Believe that AS curve will determine levels of inflation, unemployment, and economic growth.
• Supports policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transferred payments. ( Welfare, social security, and unemployment compensation)
• Provide disincentives to work, invest,  and undertake  enterpenour ventures.
• Marginal tax
• Amount of tax paid on a additional income.  ( Being taxed when you get a bonus check)
• Laffer curve relationship
• Higher taxes you have to pay, most likely not to spend)
• Relationship between Tax revenues and government revenue.
• As tax rates increase from 0, tax revenues increase 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.