Chapter 16 Supply Side Policy: Short-Run Options

Phillips curve:

A historical (inverse) relationship between the rate of unemployment and the rate of inflation; commonly expresses a trade-off between the two.

tax rebate:

A lump-sum refund of taxes paid.

Which ONE of the following would increase aggregate supply? *Human Capital Investment

A more effective higher education system

Which ONE of the following would increase aggregate supply?

Abolishing federal minimum wages

labor productivity:

Amount of output produced by a worker in a given period of time; output per hour (or day, etc.).

Among the important elements of supply-side economics are the following ideas:

Changes in marginal tax rates affect people's incentives to work, save, and invest Tax cuts tend eventually to raise tax revenues

Which of the following would be defined as a country's infrastructure?

Communication system, airports, interstate highways

If the price level increases, the short-run aggregate supply curve suggest that output will increase in the short run, because input prices _____ along with the price level

Do not rise *In the short-run, prices of final goods tend to rise much faster than the cost of the resources (inputs) used to produce them, such as labor & raw materials.

investment:

Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.

Only a leftward shift of the AS curve can reduce unemployment and inflation at the same time *Shifts of the AS Curve

FALSE

True or false: Economists generally agree that increases in tax rates will also raise tax revenues by the same percentage.

FALSE *Increase in tax rates do not raise tax revenues by as much in percentage terms as the tax-rate increases

When government intervention in factor markets increases the costs of supplying goods, this shifts the aggregate supply curve to the right. *Deregulation

False

According to the supply-side economics, which of the following are consequences of reducing marginal tax rates on income?

Higher after-tax earnings and Greater work effort

According to supply-siders, which of the following will encourage more work effort?

Higher after-tax income

The knowledge and skills possessed by the workforce are defined as: *Human Capital Investment

Human Capital

Along the hybrid short-run aggregate supply curve (SRAS), output increases when the price level ____.

Increases. *As the price level rises, firms increase their output because the costs of the resources to produce their products either don't rise or rise at a much lower rate than the price of their goods and services. The discrepancy between price and input costs lead to higher firm profits in the short run.

Which government policies increase costs of production?

Minimum wages, mandatory benefits, occupational health and safety standards

transfer payments:

Payments to individuals for which no current goods or services are exchanged, like Social Security, welfare, and unemployment benefits.

The ______ Curve shows the inverse relationship between the rates of inflation and unemployment.

Phillips

Name the historical (inverse) relationship between the rate of unemployment and the rate of inflation, which commonly expresses a trade-off between the two. *Shape of the AS Curve

Phillips curve.

Which ONE of the following would decrease aggregate supply? *Deregulation

Regulations that increase transportation costs

saving:

That part of disposable income not spent on current consumption; disposable income less consumption.

human capital

The knowledge and skills possessed by the workforce

tax elasticity of supply:

The percentage change in quantity supplied divided by the percentage change in tax rates

inflationary flashpoint:

The rate of output at which inflationary pressures intensify; the point on the AS curve where slope increases sharply.

stagflation:

The simultaneous occurrence of substantial unemployment and inflation

marginal tax rate:

The tax rate imposed on the last (marginal) dollar of income.

aggregate supply (AS):

The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.

infrastructure:

The transportation, communications, education, judicial, and other institutional systems that facilitate market exchanges

Which of the following statements are supported by the extended AD-AS model?

There is usually a trade-off between inflation and unemployment in the short-run

Which two of the following are illustrations of government's regulations increasing production costs in the product markets.

Transportation costs and food and drugs standards

Supply-side economists conclude that a reduction in marginal tax rates will shift the aggregate supply curve to the right. *Tax Incentives

True

structural unemployment:

Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.

In the short run, the economy's firms will reduce total production if the price level

decreases

Government policies influence consumer, production, and investment __________ which shape the short-run AS curve

expectations

in the view of supply-side economics, cutting marginal tax rates will shift long-run aggregate supply due to

higher investments in capital and technology

________ capital is the skills and knowledge of the workforce

human

Government regulation tends _________ production cost

increase

Many economic studies indicate that increases in tax rates tend to __tax revenues by a percentage that is ___ the tax rate increases.

increases; less than

According to the Monetarists the As illustrates that in the long run, the unemployment rate us not inversely correlated with

inflation

Under normal circumstances, the extended AD-AS model predicts that there will be a short-run trade-off between unemployment and

inflation

There is no significant trade-off between unemployment and ___ in the ___ run

inflation, long *Under normal circumstances, there is a short-run trade-off between the rate of inflation and the rate of unemployment. For example, policies meant to reduce inflation, will result in an increase in unemployment rates. Policies meant to increase aggregate demand will reduce unemployment

For the short-run aggregate supply, input prices are assumed to be ______, and they are assumed to be _____ for the long-run aggregate supply.

inflexible; flexible

When an economy moves along its short-run aggregate supply curve, we can assume that

input prices are remaining constant

Supply-side economics focuses on the incentive effect of changes in the ________ tax rates.

marginal *Supply-siders focus on the marginal or the rates on extra dollars of income because those rates affect the benefits from working, saving or investing. For example, lower marginal tax rates include more work, and therefore increase aggregate inputs of labor; whereas, higher marginal tax rates have the opposite effect including reducing the rewards for saving and investing

Along the hybrid short-run aggregate supply curve, if the price level increases, then output will

rise

The portion of unemployment that is due to the mismatch between skills and jobs is called

structural