Unit 5: Supply Side Economics & Laffer Curve

Disinflation: Reduction in the inflation rate from year to year which can be seen in the long run Phillips Curve; also occurs when AD declines

Deflation: general decline in price level

Hyperinflation: when an economy experiences an unusual high rate of inflation

Supply Side Economics: Changes in AS not AD determines level of inflation, unemployment rates, economic growth; supporters believe it's best to lower taxes and decrease regulation; Reaganomics; lower tax rates provide positive work incentives and thus shift AS curve to right

Reaganomics: poor gets money last

Laffer Curve: depicts theoretical relationship between tax rates and government revenue; as tax rates increase from zero, tax revenues increase from zero to some maximum level and then decline; 3 criticisms: empirical evidence suggest that the impact of tax rates on incentives to work, save, and invest are small. Tax cuts also increase AD which can fill inflation; where economy is actually located on curve is difficult to determine; measuring Tax Rate and Government Revenue

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Unit 4: Monetary Policy Basics

Uses of Money: Medium of Exchange Unit of Account Store of Value Types of Money: Commodity money Representative money (IOU’s) Fiat money ($ bc govt says so) Characteristics of Money: Durability Portability Divisibility Uniformity Scarcity Acceptability Money Supply: M1 Money) cash, coins, currency, traveler’s checks, demand or checkable deposits (largest component) M2 Money) M1 Money + savings accounts M3 Money) M2 Money + money market accounts + CDs Liquidity: easy to convert to cash Balance Sheet: summarizes finance decision of a bank at a certain time Liabilities = Assets Liabilities (owe): RR and ER; Assets (own): DD; net worth or owner’s equity Required Reserve + Excess Reserve = Demand Deposit RR: Bank holds a fraction of deposit back as reserve in bank ER: Held by a bank or financial institution in excess of what is required ...

Unit 1

Positive : facts; claims that attempt to describe world as is; very descriptive. Ex: minimum wage laws cause unemployment Normative : opinions; claims that attempt to prescribe how world should be. Ex: government should raise minimum wage Wants : desires of the citizens Needs : basic requirements for survival Scarcity : problem unlimited wants and needs with limited resources; fundamental problem that all societies face Shortage : quantity demanded > quantity supplied Surplus : quantity supplied > quantity demanded Factors of Production : Capital - human: knowledge and skills workers gain through education and experiences // physical: human made objects used to create other goods and services Entrepreneurship - risk taker and innovative Land - natural resources Labor - work exhorted Production Possibilities Graphs (PPG, PPC, PPF): shows alternate ways to use resources, shows most that society can produce if it uses every available resource to bes...

Unit 3: MPC & MPS, Multipliers, Deficits/Surplus/Debt, Fiscal Policy

MPC & MPS: Marginal propensity to consume: delta C / delta DI ; % of every extra dollar earned that is spent Marginal propensity to save: delta S / delta DI ; % of every extra dollar earned that is saved MPC+MPS=1 1-MPC=MPS 1-MPS=MPC Spending Multiplier Effect: initial change spending (C,Ig,G,Xn) causes larger change in aggregate spending or AD Formula: Multiplier = change in ad / change in spending Happens because expenditures and income flow continuously which sets off a spending increase in economy Formula: Multiplier = 1 / 1-MPC or 1 / MPS Multipliers are positive when there's increase in spending and negative when there's decrease Tax Multiplier: when government taxes, multiplier works reverse bc money leaves circular flow Formula: Tax Multiplier = -MPC / 1-MPC or -MPC / MPS if tax cut, multiplier is positive bc more money in circular flow *MPS, MPC, Multipliers: Fiscal Policy: changes in expenditures or tax revenues of federal gov...

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