XVI -- 1 Econ 202 McConnell & Brue Chapter 16 Extending the Analysis of Aggregate Supply I. Stagflation 1. Lots of inflation.
2. Lots of unemployment
3. Little, if any, economic growth
II. Phillips Curve - Show trade-off between inflation and unemployment
XVI -- 2 1. Conflict shown by Phillips Curve (1) Complementary goals.
(2) Conflicting goals.
2. If "Policy" favors low inflation, get high level of unemployment.
3. If "Policy" favors low unemployment, get high level of inflation.
4. Changes in Phillips Curve over time caused by: (1) Changes in institutional structures.
(2) Existence of permanently unemployed.
(3) Big, quick changes in technology.
XVI -- 3 (4) Existence (or lack of) social welfare programs.
(5) Resource supply shocks.
(6) Productivity changes.
(7) Inflationary wage-price expectations.
5. Policies used to shift Phillips Curve inward (1) Market Policies
(a) Employment and training programs.
(b) Reduce market power of monopolies and unions.
XVI -- 4 (2) Wage-Price (Incomes) Policy (Jawboning)
(a) Wage-price guidelines.
(b) Wage-price control threats.
(3) Supply-Side Economics (a) Lower tax rate for businesses and consumers.
(b) Abolish work disincentives (welfare, unemployment insurance, high individual tax rates).
(c) Increase incentives to save -- reduce tax on saving
-- provide investment incentives