Econ -Unit 3- Chap 16 Questions

1. True or False and Why?
   
   1. FALSE: Short-run aggregate supply curves reflect a direct relationship between price level and the level of real output. When the price level drops firms will produce less, reducing production and employment as well.
      
   2. FALSE: The long run aggregate supply model does NOT assume that nominal wages are fixed. It measures the changes in nominal wages that occur in response to changes in the price level. It is a determinants of aggregate supply
      
   3. TRUE: In the long run, an increase in the price level will result in an increase in nominal wages. They have a direct relationship
      
2. What do the distinctions between short-run aggregate supply and long-run aggregate supply have in common with the distinction between the short-run Phillips curve and the long-run Phillips curve? Explain.
   

   In a short-run aggregate supply, nominal wages are set (unresponsive to price-level changes) based on the expectation that price level will continue, whereas in the long-run aggregate supply, a rise in price level results in higher nominal wages and shifts the short-run aggregate supply curve to the left (and vice versa). In the short-run Phillips Curve, you assume nominal wages have been set (like the short-run aggregate supply), and you assume that inflation will continue such that it has, and that higher product prices raise business profits. In the long-run Phillips Curve, there is no apparent long-run tradeoff between inflation and unemployment; thus, both the long-run aggregate supply and the long-run Phillips curve are uniform
   

3. What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the economy's location on the curve so important in assessing tax policy?
   

   The Laffer curve depicts the relationship between tax rates and tax revenues. The Laffer curve shows the effect of taxes on production and work motivation. It shows that to a certain point taxes will help, but past the point it can negatively affect the economy. If tax rates are above m tax revenues will go down along side the incentive to work and produce. So you should where on the Laffer curve you are to know how the taxes are effecting the production rate and what the tax should be ideally to get the most out of it.
   

4. Do oil prices play a smaller role or a larger role in the US economy today than in the 1970's and 1980's? Explain.
   

   They play a smaller role. Before 1980 the oil prices greatly affected core inflation. Since 1980 oil prices have had little effect on core inflation in the US. The effect large energy intensive items pulled away from the amount if affected GDP and smaller items such as software and microchips