Unit 5 & 6 - The LRPC & Supply side economics

April 6, 2015

Since the LRPC exists at the NRU structural changes in the economy that affect unemployment (Un) will also cause the LRPC to shift.

• Increase in Un will shift LRPC > 
• Decrease in Un will shift LRPC <

Supply side economics - It is the belief that the AS curve will determine levels of inflation, unemployment, economic growth. To increase economy shift AS curve to the right. Supply side economics focus on the (marginal tax rate) : The amount paid on the last dollar earned or on each additional dollar earned. They believe that lower taxis is an incentive for business to invest in the economy, also believe that lower taxes is an incentive for workers to work hard, thereby becoming more productive. Also that lower taxes incentive for people to increase savings, and therefor create lower interest rates, which causes and increase in business investment.

• Support policies that promote GDP growth by arguing that high marginal tax rates, along with the current system of transfer payment such as, unemployment compensation and welfare provide disincentives to work, invest, innovate, and under take entrepreneurship ventures. 

Reagan economics

• Lowered the marginal tax rate to get the U.S out of a recession. (Deficit) 

The Laffer Curve: Is a trade of between tax rate and government revenue used to support the supply side argument. As tax rate increase from 0% tax revenue increase to a maximum level then decline.

Criticism

• Research suggest that tax rate on incentives to work save and incest small.
• tax cuts also increase demand, which can fuel inflation, thus creating a situation were demand excessed supply.
• Were the economy is actually on the curve is difficult to determine.