AP Macro Unit 5

When there is no policy, how does a recessionary gap close?

productivity increases, wages decrease, and aggregate supply increases

When there is no policy, how does an inflationary gap close?

productivity decreases, wages increase, and aggregate supply decreases

When there is fiscal policy, how does a recessionary gap close?

gov. increases spending, decreases taxes, and aggregate demand increases

When there is fiscal policy, how does an inflationary gap close?

gov. decreases spending, increases taxes, and aggregate demand decreases

When there is a monetary policy, how does a recessionary gap close?

FED buys bonds, decreases the discount rate and reserve requirement, and aggregate demand increases

When there is a monetary policy, how does an inflationary gap close?

FED sells bonds, increases the discount rate and reserve requirement, and aggregate demand decreases

Know the Phillips curve

inverse relationship between unemployment and inflation

When AS shifts, the Phillips curve…

shifts (the opposite direction!)

When AD shifts, the Phillips curve…

a point on the curve shifts

What is the velocity of money?

Average times a dollar is spend and respent in a year

What is the quantity theory of money equation?

MV=PY

M=money supply

V=velocity of money

P=price level

Y=output (real GDP)

PY= nominal GDP

How do we measure economic growth?

Real GDP per capita (GDP divided by population)

What is the growth rate?

change in real GDP per capita over time

How do countries grow? (5 reasons)

1. Economic system

2. rule of law

3. capital stock

4. human capital

5. natural resources

Overall, productivity

What function measures economic growth?

aggregate production function

budget deficit

annual government spending and transfer payments are greater than tax revenue

budget surplus

annual government spending and transfer payments are less than tax revenue

national debt

accumulation of all the annual budget deficits over time

entitlements

federal programs that require payments to any eligible person or unit of government (ex. social security)

ways to fix debt? (3)

1. hard default - stop paying debt

2. soft default - let inflation rise, debt becomes easier to pay

3. pay debt - reduce spending, raise taxes

effects of deficit spending (2)

1. increased national debt

2. crowding out private investment (increased interest rates)

what happens to the loanable funds market graph when there is crowding out

demand increases or supply decreases