AP Economics Unit 5: Stabilization Policy

crowding-out effect

the loss of funds for private investment due to government borrowing

\-Decrease in taxes, increase in Gov. spending

\-Increase in AD

\-Increase in PL and RGDP

\-Increase in DLF (borrowing), increase Interest rates

expansionary fiscal policy

\-Increase in taxes, decrease in government spending

\-Decrease in AD

\-Decrease in PL and RGDP

\-Decrease in DLF (borrowing) and decrease in interest rates

contractionary fiscal policy

\-Decrease in RRR, D.R, and buy bonds (bigger bucks)

\-Increase in Ms, decrease in I.R

\-Increase in AD

\-Increase in P.L and RGDP

expansionary monetary policy

\-Increase in RRR, D.R, and sell bonds (smaller bucks)

\-Decrease in Ms, Increase in I.R

\-Decrease in AD

\-Decrease in P.L and RGDP

contractionary monetary policy

velocity of money

the rate at which money changes hands

Stagflation

persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

economic growth

a steady, long-term increase in real GDP

Short-Run Phillips Curve (SRPC)

the negative short-run relationship between the unemployment rate and the inflation rate

Long Run Phillips Curve

shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience

Quantity theory of money

an increase in the money supply → Increase in P.L in the long run

Inflationary expectations

fully anticipated inflation results in an increase in P.L with no change in output

Move point along SRPC in opposite direction

Change in AD

Shift in opposite direction of SRAS

Change in SRAS