Unit 5; Day 3

• Supply Side economics( Reaganomics) (Reaganomics quick summary Video)
• Change in AD but not in AS
• Determines- rate of inflation, unemployment rates and economic growth
• Supply Side economists support policies that promote GDP growth by arguing that high marginal tax rates along with the current system of transfer payments provide disincentive to work, invest, innovate and… entrepreneurial ventures. 
• Lower Marginal tax rates induce more work which cause AS to increase and also make work more attractive

• Incentive to save and invest:
• Higher Marginal tax rates reduce rewards for savings and investment
• Consumption might increase but investment depends upon savings
• Lower marginal tax rates encourage savings and investment 

• Laffer curve- theoretical relationship between tax rates and govt revenue 
• As tax rates increase from zero, govt revenue increase from zero to some maximum level and then decline
• Research suggests that impact of tax rates on incentives to work, save and invest is small 
• Tax cuts also increase demand which fuels inflation and causes demand to exceed supply 
• Where the economy is actually located on the curve is difficult to determine