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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).
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Lesson 16: Aggregate Shocks | Unit 1: Instability
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Page: 1 of 21
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The aggregate market is a useful analysis for the study of the macroeconomy and its adjustments.- The aggregate market tends toward equilibrium.
Short-Run Equilibrium:- Intersection of AD and SRAS curves.
- Expenditures on real output match production.
- Labor market is prone to be out of equilibrium.
Long-Run Equilibrium: - Intersection of AD and LRAS curves.
- Expenditures on real output match production.
- Labor market in equilibrium.
Real world changes can be analyzed by examining how the aggregate market adjusts toward equilibrium.
To examine aggregate market adjustments we need to make use of the ceteris paribus concept.- The aggregate market curves, AD, LRAS, and SRAS, are constructed assuming other things remain unchanged.
- The determinants of each curve, initially assumed constant, don't really stay unchanged, and they cause changes in the aggregate market.
- The purpose of this aggregate market analysis is to help us to understand why the macroeconomy tends to be unstable, volatile and prone toward business cycles.
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DEMAND INCREASE An increase in the willingness and ability of buyers to purchase a good at the existing price, illustrated by a rightward shift of the demand curve. An increase in demand is caused by a change in a demand determinant and results in an increase in equilibrium quantity and an increase in equilibrium price. A demand increase is one of two demand shocks to the market. The other is a demand decrease.
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PURPLE SMARPHIN
[What's This?]
Today, you are likely to spend a great deal of time watching the shopping channel looking to buy either a genuine down-filled comforter or a 200-foot blue garden hose. Be on the lookout for mail order catalogs with hidden messages.
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Natural gas has no odor. The smell is added artificially so that leaks can be detected.
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"What gets measured gets done." -- Peter Drucker, educator
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ICCH
International Commodities Clearing House
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