ap economics: module 33 terms

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t or f: in LR, a change in MS doesn’t affect RGDP/real quantity of money or AD, but affects APL

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1

t or f: in LR, a change in MS doesn’t affect RGDP/real quantity of money or AD, but affects APL

t: ↑MS → ↓IR → ↑AD (↑I and ↑C) → ↑RGDP (stops here in SR) → ↑ N wages and ↑APL → ↓SRAS → RGDP back to eq.

  • money is neutral in LR

  • change in APL is proportionate to change in MS

*opposite for a decrease in MS

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2

why is using the classical model ineffective for times of low inflation, but effective in times of high inflation?

low inflation → slow adjustment of wages and APL

  • changes in SRAS/MS can affect RGDP

high inflation → quick adjustment of wages + prices

  • changes in MS affect IR, but not RGDP

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3

can the government increase revenue by printing money?

yes

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4

seigniorage

revenue generated by the govt.’s right to print money

  • <1% of the govt.’s budget

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5

inflation tax

reduction in the value of money (purchasing power) held by the public caused by inflation (govt. prints $ to cover deficit)

  • x% inflation → x% tax rate of the money’s value

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6

inflation causes the tax on holding money to ___, so people end up spending money and acquiring interest-bearing assets ____.

increase, faster

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7

cycle of hyperinflation

↑MS → ↑inflation → ↑MS by a greater amount to get same amount of g/s as before → ↑inflation → so on

  • if the desire to not hold money causes people to spending it faster than the govt. prints it, then the APL increases faster than the MS → govt. must increase MS rapidly → hyperinflation → cycle continues

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8

2 things that lead to an increased APL

decrease in AS (cost-push) or an increase in AD (demand-pull)

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9

cost-push inflation

inflation caused by a significant increase in the price of an input with economy-wide importance

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10

demand-pull inflation

inflation caused by an increase in aggregate demand

  • AD > AS → “too much money chasing too few goods”

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11

in SR, policies that create a booming economy do what to inflation?

increase it

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12

in SR, policies made to reduce inflation do what to the economy?

puts it in a depression

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13

IMPORTANT INFO

inflationary policies → SR political gains

policies to combat inflation → SR political costs

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