It's Friday

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It's Friday!
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Supply -Side Economics
Whereas Keynesiansemphasize demand-management,
the supply-sidersrecommend the use of
taxincentives to shift theaggregate supply
function
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Issues in the 1980 Presidential Campaign

• High inflation
• High unemployment
• High nominal and real interest rates
• High federal deficit

Are you better off than you were four years
ago?
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Shifting the AS Curve
By shiftingAS, we can have rising
incomeswithout inflation
Price level
AS
Aggregatedemand
Real GDP
0
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Shifting AS
Key principles of supply-side economics

• Marginal tax rates have a major impact on
  individual labor-leisure decisions.
• High marginal tax rates under the pre-1981
  Federal tax code created disincentives to work
  and entrepreneurial initiative.
• The lowering of marginal tax rates would have an
  effort releasing effect by raising the
  opportunity cost of leisure and the reward for
  work.

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The Laffer Curve
TaxRate ()
Laffer claimedmarginal tax rateswere above R1
R2
R1
Tax Revenue
A
B
0