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: Rate of Return, Investment Demand, Disposable Income

Investment: money spent or expenditures on new plants (factories), capital equipment (machinery), technology (hardware and software), new homes, inventories (goods sold by producers) Expected Rate of Return: -How does business make investment? Cost / benefit analysis -How does business determine benefits? Expected rate of return -How does business count the cost? Interest costs -How does business determine amount of investment they undertake? Compare expected rate of return to interest cost (return > interest cost : invest // return < interest cost: don't invest) -What determines cost of investment decision? Real Interest Rate (r%) Investment Demand Curve (ID) - What is the shape of investment demand curve? Downward sloping -Why? When interest rates are high, fewer investments are profitable; when low, more investments are profitable. Conversely, there are few investments that yield high rates of return, and many that yield low rates of return D...

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