Supply Side of Economics

Supply side Economics/ Reaganomics:

• to stimulate active policy, to stimulate, to work save and invest
• Includes tax cuts, which increases disposable income

Laffer curve: it displays the theoretical relationship between tax rates and government revenue

Criticisms of the Laffer Curve:

1. Empirical evidence suggests that the impact of tax rates on incentives to work, save, and invest are small. 
2. Tax cuts also increase demand which can fuel inflation 
3. Where the economy is actually located on the curve is difficult to determine 9w

Phillips Curve

In the short run: the Phillips curve represents a trade-off between inflation and unemployment.

• As inflation increases, unemployment decreases 

Each point on the Phillips Curve corresponds to a different level of output.

Long run Phillips curve: 

• it occurs on the natural rate of unemployment, 
• it is represented by a vertical line. 
• There is no tradeoff between inflation and unemployment 
• the economy produces at a full ouput level 
• The LRPC (Long run phillips curve) will only shift if the LRAS curve shifts. 
• Increases in unemployment, it will shift LRPC ->
• Decreases in unemployment, it will shift LRPC <-

Video FRQ (Monetary Policy) Scenario #5

Loanable Funds Market

Is an interest rate of 50% good or bad?

• Bad for borrowers but good for lenders 

The loanable funds market is the private sector supply and demand of loans. 

This market brings together those who want to lend money (savers) and those who want to borrow (firms with investment spending projects)

• This market shows the effect on REAL INTEREST RATE 
• Demand- Inverse relationship between real interest rate and quantity loans demanded 
• Supply- Direct relationship between real interest rate and quantity loans supplied 

This is NOT the same as MONEY MARKET (supply is not vertical)

Prime Rate: it is the interest rate that banks charge their most creditworthy  customers

Click the link below for more information on loanable funds:
Loanable Funds