10 & 11 (supply-side) Flashcards
Justification for downward sloping AD curve
Wealth Effect, effect of higher interest rates on investment.
Justification for upward sloping AS curve.
(this might not be possible according to JG) law of diminishing returns, but have to make a series of stupid assumptions: workers only care about W, infinite suplly of labor, wages lag behind behind prices.
What happens if we assume an upward sloping AS curve?
Self correcting mechanisms for recessionary and inflationary gaps that result in full employment. However can also lead to supply-side stagflation as in the case of the 1970s when oil and food prices (inputs) were high.
Idea for supply-side tax cuts.
Shift AS curve to the right (creating economic growth and lower prices). Create incentives to work and invest. Pay for themselves through growth.
Why do s-side tax cuts “pay for themselves?”
incentive working (each hour has more dollar value– though this can also go the other way), saving (cut dividend tax rate), investing (profits are bigger, can give tax credits for more investment).
Is there a self correcting mechanism?
Wages and Prices should in theory be able to adjust, but because people don’t like getting pay cuts and because most of the free market assumptions aren’t true, not really.
