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LAW OF DEMAND: The inverse relationship between demand price and the quantity demanded, ceteris paribus. This fundamental economic principle indicates that as the price of a commodity decreases, then the quantity of the commodity that buyers are able and willing to purchase in a given period of time, if other factors are held constant, increases. This law is incredibly important to the study of economics. If you compiled a top ten list of economically important laws, the law of demand would be right there at the top.

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LAFFER CURVE: The graphical inverted-U relation between tax rates and total tax collections by government. Developed by economist Arthur Laffer, the Laffer curve formed a key theoretical foundation for supply-side economics of President Reagan during the 1980s. It is based on the notion that government collects zero revenue if the tax rate is 0% and if the tax rate is 100%. At a 100% tax rate no one has the incentive to work, produce, and earn income, so there is no income to tax. As such, the optimum tax rate, in which government revenue is maximized, lies somewhere between 0% and 100%. This generates a curve shaped like and inverted U, rising from zero to a peak, then falling back to zero. If the economy is operating to the right of the peak, then government revenue can be increased by decreasing the tax rate. This was used to justify supply-side economic policies during the Reagan Administration, especially the Economic Recovery Tax Act of 1981 (Kemp-Roth Act).

     See also | taxes | supply-side economics | Kemp-Roth Act | income tax | conservative |


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AUTONOMOUS EXPENDITURES

Expenditures on aggregate production by the four macroeconomic sectors that do not depend on income or production (especially national income or even gross domestic product). That is, changes in income do not generate changes in these expenditures. Each of the four aggregate expenditures--consumption, investment expenditures, government purchases, and net exports--have an autonomous component. Autonomous expenditures are affected by the ceteris paribus aggregate expenditures determinants and are measured by the intercept term of the aggregate expenditures line. The alternative to autonomous expenditures are induced expenditures, expenditures which do depend on income.

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