Supply-Side Policy and Short-Run Options

Flashcards about Supply-Side Economics, Aggregate Supply, and Tax Policies.

Monetarists view of Aggregate Supply

The aggregate supply is vertical at the natural rate of unemployment.

Keynesians view of Aggregate Supply

The aggregate supply is flat until full employment is reached.

Consensus view of Aggregate Supply

An upward-sloping curve that becomes vertical at full employment

Aggregate Supply and Demand Relationship

If aggregate supply is upward sloping, a shift in aggregate demand results in a tradeoff between output and price level; this relationship is drawn in the Phillips Curve.

Result of AS shifting to the left

Unemployment and inflation both increase, and the Phillips curve shifts to the right.

Supply-side policy

Attempts to shift the AS curve to the right, causing a decrease in unemployment and inflation.

Assumption of Supply-Side Tax Cuts

People and firms will produce more if they get to keep a larger fraction of what they earn.

Supply-siders favor tax cuts to…

Provide incentives to encourage saving and investment.

Tax elasticity of supply

Measures how much supply will respond to a tax cut.

Importance of human capital incentives

Emphasize the quality of the labor force and reduce structural employment barriers, helping shift the aggregate supply curve to the right.

Positive impact on the stock of human capital

Worker training, spending on education, and affirmative-action programs.

Impact of deregulation on aggregate supply

Eliminates barriers to the efficient employment of resources, thus reducing costs at every level of output.

Agreements like NAFTA…

Have the potential to shift aggregate supply to the right by reducing the cost of imported inputs and finished goods.

Belief of strict Keynesians Below Full Employment

Increased aggregate demand raises output only, not prices.

False statement about investment in human capital

Investment in human capital reduces saving and shifts the aggregate supply curve leftward.

The Consensus View Aggreagate supply curve

The aggregate supply curve has a gentle, accelerating upward slope.

False statement about marginal tax rate and incentive to work

As the marginal tax rate increases, there is more/less incentive to work because workers want to maintain their "after tax" income level.

Conditions for tax reduction to yield larger tax revenues

A reduction in tax rates will yield larger tax revenues if the absolute value of the tax elasticity of supply is greater than 1.0.

Impact of a leftward shift of the aggregate supply curve

A leftward shift of the aggregate supply curve increases inflationary pressures and reduces employment.

Impact of discrimination on the aggregate supply curve

Discrimination against any group can shift the aggregate supply curve to the left when the best person for a given job is not hired.

Aggregate supply curve according to strict Keynesians

Horizontal until full employment is reached, and then it becomes vertical.

Cause of stagflation

A decrease in aggregate supply

How to lower unemployment and inflation

Rightward shift of the aggregate supply curve.

What the Phillips Curve shows

An inverse relationship between the unemployment rate and inflation.

Slope of the AS curve according to monetarists

Vertical.

Supply-side policies are designed to achieve…

A rightward shift of the aggregate supply curve.

Supply-side policies are designed to…

Shift the Phillips curve leftward.

Which shift will cause lower rates of both unemployment and inflation?

An increase in aggregate supply.

Impact on the economy of a given shift in aggregate demand depends on…

Shape of the aggregate supply curve.

Declining investment in infrastructure…

All of the above.

Which of the following would cause a rightward shift in the aggregate supply curve?

Lifting trade restrictions.

Which of the following will definitely lead to a larger value on the misery index?

Stagflation.

If the marginal tax rates increase, then…

Entrepreneurship is discouraged.

The tradeoff between unemployment and inflation is the result of an aggregate supply curve that is…

Upward sloping.

Which of the following groups would use a decrease in government regulation to increase the incentive to work and produce?

Supply-siders.

If the absolute value of the tax elasticity of supply is 0.5, a tax cut of 5 percent would…

Increase output by 2.5 percent and decrease tax revenues.

Which of the following changes in trade policy will increase aggregate supply?

The relaxation of immigration laws to allow more immigration.

The marginal tax rate indicates the…

Tax rate imposed on the last dollar of income.

If a new tax policy raises the tax rate 2% but causes the quantity supplied to fall by 10%, the absolute value of the tax elasticity of supply is:

5.

If the government reduces the regulations that impact businesses, supply-side economists believe unemployment will…

Decrease and the price level will decrease.