ap macro mods 34-40

Liquidity trap-

occurs whenever there is a sharp reduction in demand for loanable funds

-When monetary policy is unable to stimulate an economy because interest rates are up against the zero bound

-fed cant use monetary policy 

The sources of long-run growth

1. Productivity- output per worker 

      2. Physical capital-  human made resources such as buildings and machines

      3. Human Capital-  improvement in labor created by the education and knowledge embodied in the workforce

      4. Technology- technical means fir the productions of goods and services 

Aggregate production function-

hypothetical function that shows how productivity (real GDP per worker) depends on the quantities of physical capital per worker and human capital per worker as well as the state of technology 

Diminishing returns to physical capital-

when holding the amount of human capital and the state of technology fixed, each successive increase in the amount of physical capital leads to smaller increase in productivity 

as more physical capital (machines, buildings) is added to a fixed amount of human capital and technology, the additional output produced by each new unit decreases

Why do economic growth rates differ?

Some countries engage in or encourage research and development spending to create new technologies and prepare them for practical use

1. Adding to physical capital-though high rates and investment spending

      2.   Adding to Human Capital- though education

The role of Government promoting growth rates

government plays a role in building infrastructure; roads, power lines, ports, information networks and other parts of the economy's physical capital

Government also plays an indirect role in making high rates of private investment spending possible

Much of an economy's human capital is the result of government spending on education

Much important r&d is done by government agencies 

1. Physical Capital- investment

      2.   Human Capital-  funding colleges and scholarships

     3.    Technology- 

      4.    Political stability, property rights, and excessive government intervention-

ong run growth and the PPC

Long run Growth ADAS model

Political stability and protection of property rights are crucial in long run economic growth

When the government isn't corrupt, excessive government intervention can be a brake on economic growth

If large parts of the economy are supported by government subsidies, protected from import, or otherwise insulated from competition, productivity tends to suffer because of lack of incentives

Economic growth can be shown on a production possibility curve as a shift outward of the curve.

•There is a trade-off between investment and consumer goods.

• Depreciation is a loss in the value of physical capital due to wear, age or obsolescence.

• Some investment is needed to counteract depreciation.

What moves pcb moves lrs

1. Classical model of the price level

Asserted that monetary policy only changed the price level, not aggregate output 

-increase in money supply leads to inflation 

Keynesian Economics

Short run effects of shifts in aggregate demand output

-keyens argued other factors than money are mainly responsible for business cycles  

2. Animal spirits-  confidence, fear, and optimism—that drive economic decisions, particularly business investment.

-because of the fact of confidence it could lead to recession or inflation of economy 

Macroeconomic policy activism

use of discretionary fiscal and monetary policies by governments and central banks to stabilize the business cycle, aiming to mitigate recessions and curb inflation

Monetarism

 asserted that gdp will grow steadily if money supply grows steadily 

Called for a shift from monetary policy rule to that of discretionary monetary policy

Gdp would grow steadily if the money supply grew steadily

Monetarism was influenced for a time but was eventually rejected

Discretionary monetary policy-

when the central bank changes interest rates or money supply based on its assessment of the state of the economy 

Velocity of money-

ratio of nominal gdp to the money supply. It is a measure of the number of times the average dollar bill is spent per year.

M x V = P x Y

Both sides  = nom gdp

m= Money, 

v= velocity, 

P= price level, 

Y= RGDP

natural rate hypothesis-

an economy has a long-run, equilibrium rate of unemployment determined by structural and frictional factors, not aggregate demand

Rational expectations-

is the view that individuals and firms make decisions optimally using all available information 

Real business cycle theory-

- fluctuations in the rate of growth of total factor productivity cause the business cycle 

Is expansionary monetary policy helpful in the long run?

Not helpful because it causes inflation  

Is expansionary fiscal policy effective in fighting recession?

Yes, in the long run it could lead to inflation but it is effective in the short run

Can monetary and/or fiscal policy lower unemployment in the long run?

no

Should fiscal policy be used in a discretionary way?

yes

Should monetary policy be used in a discretionary way?

yes