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UNIT 5 Notes

Key-Terms:
Stagflation- high inflation and high unemployment at the same time
Deflation- a fall in the average level of prices in an economy
Disinflation- reduction in inflation from year to year and can be seen in LRPC
Inflation- rise in the general level of prices in an economy (Zimbabwe)
NRU = frictional, structural, and season unemployment
Misery Index= combination of inflation and unemployment in any given year (single digit misery if good)
Hyperinflation- where there is an unusually high rate of inflation which can cause the currency to lose value (Zimbabwe)

Supply Side Economics(Reaganomics)
*changes in AS and not AD determines the level of inflation, unemployment rates, and economic growth
*trickle down effect: rich receive benefit before poor
economic growth is created by lowering taxes and decreasing regulation
lower tax rates provide positive work incentives and thus shifts the AS curve to the right

Laffer Curve 
-depicts a theoretical relationship between tax rates and government revenue; as tax rates increase from 0, tax revenue increases from 0 to some maximum level and then declines

Criticisms of the Laffer Curve
-empirical evidence suggests that the impact of tax rates on incentives to work, save, and invest are small
-tax cuts also increase demand which can fuel inflation
-where the economy is actually located on the Laffer curve is difficult to determine

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