Phillips Curve/ Laffer Curve

William Phillips, a New Zealand born economist, wrote a paper in 1958 William Phillips titled The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, , which was published in the quarterly journal EconomicaEconomica.

short-run trade-off rate of inflation rate of unemploymentNormally, there is a short-run trade-off between the rate of inflation and the rate of unemployment. higher rates of inflationhigher rates of unemploymentAS shocks can cause both higher rates of inflation and higher rates of unemployment. no significant Inflation/GDP trade-off over long periods of timeThere is no significant Inflation/GDP trade-off over long periods of time. 10% 10% Stagflation Phillips Curve AS 2 AS 1 AD 3% 6% GDP PL

Annual rate of inflation Unemployment rate (percent) 7%6%5%5%4%3%2%2%1%7%6%5%5%4%3%2%2%1% AS inflation declines AS inflation declines... U nemploy. increases PCPCPCPC

Long-Run Phillips Curve The Long-Run Phillips Curve is vertical, like the Long Run Aggregate Supply Curve. So, in the long run there is no tradeoff between inflation and unemployment. Only the Price Level will change. Inflation Rate% Unemployment Rate % 5 3 SRPC LRPC

Laffer Curve What is the optimal tax rate? A tax of 0% will provide no tax revenue. A tax rate of 100% will also lead to no tax revenue (no incentive to work). Answer must be somewhere in between. Tax Rate Tax Revenue 0 100

0 100 L Tax revenue (dollars) Tax rate (percent)

0 100 M L Tax revenue (dollars) Tax rate (percent)

0 100 M N L Tax revenue (dollars) Tax rate (percent)

0 100 M M N L Tax revenue (dollars) Tax rate (%) MaximumTaxRevenue