Introduction to Macroeconomics Econ 104 a,c,d,h – Spring 2012
Worksheet 8 – Supply-Side Economics, Uthmployment and Inflation
Due in discussion sections April 20 or on moodle.
1. What were the main economic problems of 1979,80?
From 1979-1982, inflation was cured by a recession. Keynesian Monetary and Fiscal Policy was
challenged in the 1970s due to failures and stagflation. The 1970s and 1980s saw a rise in
alternative policies including Monetarism and Supply-side policy.
2. Look at the following graph and describe it. (Hint: it was originally drawn on the back of
a cocktail napkin, and it isn’t funny.)
This graph is known as the Laffer Curve. It is a hypothetical representation of the
relationship between government revenue raised by taxation and all possible rates of
taxation. If the income tax level is set below this level, raising taxes will increase tax
revenue. And if the income tax level is set above this level, then lowering taxes will
increase tax revenue. Although the theory claims that there is a single maximum and that
the further you move in either direction from this point the lower the revenues will be, in
reality this is only an approximation. 3. How did President Reagan say he could fix the economy? (with the help of his supply side
economist friends?) What did supply-side policy promise?
For Supply side solutions, the supply tax policies of the 1980s failed to achieve employment
savings and investment increased. President Reagan used supply side economic policy as rationale
for the tax cuts in 1981.
4. Did supply-side policy work for the economy?
In 1975, some economists started to look up at the supply side, trying to shift th