Unit 5: Long-run Consequences of Stabilization Policies

These flashcards encapsulate key vocabulary and concepts from the lecture on long-run consequences of stabilization policies in macroeconomics.

Expansionary Fiscal Policy

Increases aggregate demand in the short-run, fixing recessionary gaps and creating a budget deficit.

Contractionary Fiscal Policy

Decreases aggregate demand in the short-run, fixing expansionary gaps and creating a budget surplus.

Expansionary Monetary Policy

Increases aggregate demand, helping to fix recessionary gaps.

Contractionary Monetary Policy

Decreases aggregate demand, helping to fix expansionary gaps.

Short-run Phillips Curve (SRPC)

Shows the short-run trade-off between the unemployment rate and the inflation rate.

Long-run Phillips Curve (LRPC)

Indicates the natural rate of unemployment, where the economy does not have accelerating inflation.

Inflationary Gap

Occurs when the economy operates above full employment, resulting in increased inflation.

Recessionary Gap

Occurs when the economy operates below its potential output, leading to higher unemployment.

Crowding-out Effect

Occurs when government borrowing increases interest rates, which reduces private investment.

Budget Balance

The difference between tax revenue and government spending plus transfer payments.

Quantity Theory of Money

Posits that the money supply and price level are directly proportional in the long run.

Rule of 70

A formula to estimate the number of years required to double GDP per capita, calculated as 70 divided by the annual growth rate.

Supply-side Fiscal Policies

Policies aimed at increasing production through contractionary fiscal measures.

Aggregate Demand (AD)

The total demand for goods and services within an economy at a given overall price level and in a given time period.

Short-run Aggregate Supply (SRAS)

The total supply of goods and services that firms in an economy can sell at a given price level in the short run.

Long-run Aggregate Supply (LRAS)

The total supply of goods and services that can be produced in the long run when all resources are fully utilized.

What are stabilization policies?

Stabilization policies are macroeconomic measures employed by governments or central banks to reduce volatility in the economy, aiming to control inflation, unemployment, and overall economic growth.

What are the long-run consequences of stabilization policies?

The long-run consequences of stabilization policies can include changes in investment behavior, shifts in employment levels, impacts on inflation rates, and potential effects on economic growth.

How can stabilization policies affect inflation in the long term?

Stabilization policies may help manage inflation in the short term, but if mismanaged, they can lead to higher inflation or even deflation in the long run, depending on the measures taken.

What impact do stabilization policies have on investment?

In the long run, effective stabilization policies can promote investment confidence, leading to increased economic growth, while poor policies can deter investment due to uncertainty.