Shifts in the aggregate supply curve/ supply-side policies

I.Shifting the Aggregate Supply

A.Shifting the short-run AS curve

1.Price of Labor

a.An increase in wage rates will reduce production, shifting the AS curve to the left

A. Shifting the short-run AS curve 1.Price of Labor 2.Price of Inputs

a.Any change in the price of raw materials, capital (human or physical), or any component of a firm’s good or service will shift the AS curve

A. Shifting the short-run AS curve 1.Price of Labor 2.Price of Inputs 3.Taxation

a.Labor Taxes – taxes a firm pays for/ to employees (social security, 401k matching, health insurance)

3. Taxation a.Labor Taxes – taxes a firm pays for/ to employees (social security, 401k matching, health insurance) b.Profit Taxes – taxes on the profits earned by selling a good or providing a service

3. Taxation a.Labor Taxes – taxes a firm pays for/ to employees (social security, 401k matching, health insurance) b.Profit Taxes – taxes on the profits earned by selling a good or providing a service c.Emission Taxes – taxes paid for pollution or necessary business practices

I. Shifting the Aggregate Supply A.Shifting the short-run AS curve B.Shifting the long-run AS curve

1.Changes that improve quality or the quantity of goods but not the price

B. Shifting the long-run AS curve 1.Changes that improve quality or the quantity of goods but not the price 2.Changes that improve technology, increase labor capital, improve production efficiency

B. Shifting the long-run AS curve 1.Changes that improve quality or the quantity of goods but not the price 2.Changes that improve technology, increase labor capital, improve production efficiency 3.Economists tend to favor policies that improve long-run AS because they resist inflation

I. Shifting the Aggregate Supply A.Shifting the short-run AS curve B.Shifting the long-run AS curve C.Supply-side policies

1.Highly market oriented, supply-side policies try to eliminate market hindrances created by labor legislation and government intervention

1. Try to eliminate market hindrances a.Labor

i.Increases labor mobility by creating incentives to firms to hire and laborers to accept

a. Labor i.Increases labor mobility by creating incentives to firms to hire and laborers to accept ii.Change labor laws to make it easier for firms to hire and fire

a. Labor i.Increases labor mobility by creating incentives to firms to hire and laborers to accept ii.Change labor laws to make it easier for firms to hire and fire iii.Education and training to increase the quality of labor. Tax breaks to firms that implement training

a. Labor i.Increases labor mobility by creating incentives to firms to hire and laborers to accept ii.Change labor laws to make it easier for firms to hire and fire iii.Education and training to increase the quality of labor. Tax breaks to firms that implement training iv.Encourage people to move to different regions for jobs

a. Labor v.Cutting back on social welfare/ unemployment benefits to encourage people to accept jobs

a. Labor v.Cutting back on social welfare/ unemployment benefits to encourage people to accept jobs vi.Reduce union power

a. Labor v.Cutting back on social welfare/ unemployment benefits to encourage people to accept jobs vi.Reduce union power vii.Abolish the minimum wage

a. Labor v.Cutting back on social welfare/ unemployment benefits to encourage people to accept jobs vi.Reduce union power vii.Abolish the minimum wage viii.Decrease marginal income tax rates and decrease labor taxes for firms

1. Try to eliminate market hindrances a.Labor b.Capital

i.Tax breaks/ deductions for firms to stimulate investment/ reinvestment

b. Capital i.Tax breaks/ deductions for firms to stimulate investment/ reinvestment ii.Lower taxes on dividends will help to stimulate investment

b. Capital i.Tax breaks/ deductions for firms to stimulate investment/ reinvestment ii.Lower taxes on dividends will help to stimulate investment iii.Lower profit taxes

1. Try to eliminate market hindrances a.Labor b.Capital c.Competition

i.Privatization of government-run businesses and deregulation of markets

c. Competition i.Privatization of government-run businesses and deregulation of markets ii.Subsidies and tax reduction for firms funding R&D

c. Competition i.Privatization of government-run businesses and deregulation of markets ii.Subsidies and tax reduction for firms funding R&D iii.Tax relief for entrepreneurship

c. Competition i.Privatization of government-run businesses and deregulation of markets ii.Subsidies and tax reduction for firms funding R&D iii.Tax relief for entrepreneurship iv.Tax-free trade

I.Shifting the Aggregate Supply II.Strengths and Weaknesses of these policies

A.Advantages of Demand-side policies

1.Macro Goals

a.Allows politicians to adjust economy to meet macro goals b.Power over monetary and fiscal policies, influence over the level of economic activity, outputs, unemployment, inflation, and trade balance

A. Advantages of Demand-side policies 1.Macro Goals 2.Stability

a.Built-in stabilizers help even out the business cycle

A. Advantages of Demand-side policies 1.Macro Goals 2.Stability 3.Government Goals

a.Allows governments to adjust economy based on consensus views of the populace and the ideals of social/ economic welfare

A. Advantages of Demand-side policies 1.Macro Goals 2.Stability 3.Government Goals 4.Keynesian Multiplier

a.The multiplier effect will result across successive “rounds” of the economy

II. Strengths and Weaknesses of these policies A.Advantages of Demand-side policies B.Weaknesses of Demand-side policies

1.Business cycles are erratic and can be influenced too much by political intervention 2.Inflation rises and deficits occur since spending during troughs is rarely made up with excesses experienced in peaks 3.Increased indebtedness led to exchange rate problems 4.Money rarely stayed in the domestic economy and frequently was used for imports

II. Strengths and Weaknesses of these policies A.Advantages of Demand-side policies B.Weaknesses of Demand-side policies C.Difficulties in attaining macro objectives – trade-off problems

C. Difficulties in attaining macro objectives 1.Growth and Inflation

a.By using expansionary fiscal policy to stimulate the economy and stimulate consumer spending, the government also creates inflationary pressure which results in higher final prices

C. Difficulties in attaining macro objectives 1.Growth and Inflation 2.Budget and unemployment

a.When unemployment rises the government can decrease taxes or increase government spending to shift AD to the right b.Either will cause deficit spending which will hinder any opportunity for a balanced budget

C. Difficulties in attaining macro objectives 1.Growth and Inflation 2.Budget and unemployment 3.Growth and trade balance

a.In stimulating the economy, incomes increase and so do the number of imports because high growth rates are associated with inflation

C. Difficulties in attaining macro objectives 1.Growth and Inflation 2.Budget and unemployment 3.Growth and trade balance 4.Interest rates and exchange rate

a.When the Central Bank lowers the interest rate to stimulate the economy foreign investors pull some of their money out to place it in countries with a higher rate of return

II. Strengths and Weaknesses of these policies A.Advantages of Demand-side policies B.Weaknesses of Demand-side policies C.Difficulties in attaining macro objectives – trade-ff problems D.Time lags and exacerbation of the business cycle

1.By trying to adjust the cycle a government might simply create a stop- and-go business cycle with little steadiness 2.This is due to time lags that exist between fiscal and monetary policy initiatives and noticeable effects

II. Strengths and Weaknesses of these policies A.Advantages of Demand-side policies B.Weaknesses of Demand-side policies C.Difficulties in attaining macro objectives – trade-ff problems D.Time lags and exacerbation of the business cycle E.Weaknesses in supply-side policies

1.Incentive function of tax cuts is limited

a.Tax cuts are limited in their effectiveness b.The huge tax cuts from the Reagan Administration only resulted in a 0.4% increase in labor supply

E. Weaknesses in supply-side policies 1.Incentive function of tax cuts is limited 2.Social costs

a.Cutting government spending cuts social welfare programs which will increase unemployment in the short run b.Also it increases the inequality in income distribution by sending people over the poverty line

E. Weaknesses in supply-side policies 1.Incentive function of tax cuts is limited 2.Social costs 3.Imperfectly functioning markets

a.Supply-side economists say that the markets do not function because of government interaction that artificially keeps the wage level too high b.Demand-side economists say that the markets are imperfect and need government intervention