AP Macro Unit 5

Quantity Theory of Money

The speed at which the money supply and inflation grow at a directly proportional way

What are the 3 things that can be done to get out of either a recessionary or inflationary gap?

1.)No policy at all(automatic stabilizers) 2.)Fiscal policy 3.)Monetary policy

What is crowding out?

Large deficit spending

When Expansionary Fiscal policy is happening, what happens to the Interest rates?

It increases

When Contractionary Fiscal policy is happening, what happens to the Interest rates?

It decreases

When Expansionary Monetary policy is happening, what happens to the Interest rates?

It decreases

When Contractionary Monetary policy is happening, what happens to the Interest rates?

It increases

Monetary policy affects the Money supply or the Money demand?

The Money Supply

Fiscal policy affects the Money supply or the Money demand?

Money Demanded

What’s included in Fiscal policy?

Government spending and Taxation

What happens in the Positive Demand Shock? and what are it’s effects on unemployment and the Price level?

Aggregate demand is increasing, which then effects the Unemployment rate to decrease and the Price level to increase

What happens in the Negative Demand Shock? and what are it’s effects on unemployment and the Price level?

Aggregate demand is decreasing, which then effects the Unemployment rate to increase and the Price level to decrease

What happens in the Positive Supply Shock? and what are it’s effects on unemployment and the Price level?

Short-run Aggregate supply increases, leading both the Unemployment and Price level to decrease

What happens in the Negative Supply Shock? and what are it’s effects on unemployment and the Price level?

Short-run Aggregate supply decreases, leading both the Unemployment and Price level to increase

When the Short-run Aggregate supply decreases, what is happening?

Stagflation is happening

What is stagflation?

It’s simultaneous occurrence of stagnant economic growth, high unemployment, and high inflation

In the Phillips curve, what can it allow you to see the behavior of?

Both the SRAS and AD curves

Describe the Phillip’s curve

X-axis: unemployment rate

Y-axis: inflation, where it goes all the way down to the negative

Short-run Phillips curve is downward sloping

Long-run Phillips curve is vertical

On the Phillip’s curve, the negative y-axis represents?

Deflation

What is deflation?

a sustained decrease in the general price level of goods and services across an economy, occurring when the inflation rate falls below 0%

Why is the Short-run Phillips curve downward sloping?

It’s because when there's a recession there's high unemployment, which shows a negative output gap

The positive output gap is where on the short-run Phillips curve?

The furthest left

Where can you find full employment on the Short-run phillip's curve?

On the middle of the short-run Phillips curve

Where is an inflationary gap in the Phillip’s curve is shown?

In the movement along the Short-run Phillip’s curve, where we move from the long-run equilibrium to a leftward movement on the short-run Phillips curve

Where is an Recessionary gap in the Phillip’s curve is shown?

In the movement along the Short-run Phillip’s curve, where we move from the long-run equilibrium to the downward movement on the short-run Phillips curve

A change in the Aggregate demand curve, causes what to happen on the short-run Phillips curve?

A movement along the curve

A shift in the Short-run Aggregate supply curve, causes what to happen on the short-run Phillips curve

A shift to happen

An increase in the Aggregate demand curve causes what to happen to the Short-run Phillips curve?

An leftward movement along the short-run Phillips curve

A decrease in the Aggregate demand curve causes what will happen to the Short-run Phillips curve?

An rightward movement along the short-run Phillips curve

An increase in the Short-run Aggregate supply curve causes what to happen to the Short-run Phillips curve?

A decrease in the Short-run Phillips curve

An decrease in the Short-run Aggregate supply curve causes what to happen to the Short-run Phillips curve?

An increase in the Short-run Phillips curve

Why is the Long-run Phillips curve vertical?

It’s because inflation expectations fully adjust to actual inflation, causing unemployment to return to its natural rate (NAIRU), regardless of the inflation level

With the Long-run Phillips curve being vertical, what does it imply about the inflation and unemployment?

That despite an increase or decrease in inflation, the economy will return to a natural rate of unemployment

What is the chain rule in the short-run when the Money Supply increases?

A decrease in the Interest rates, an Increase in Investment, an Increase in Consumption, and an increase in GDP

What does the Money Market graph show about the Money Supply?

A short-run of the change in the Money Supply

What does the Loanable funds market show about the Money supply?

A long-run of the change in the Money Supply

What causes a shift in the Long-run Phillips curve?

A change in the natural rate of unemployment

What relationship does LRAS and LRPC have?

An inverse relationship

What is the quantity theory of money equation?

P = VM/Y

In the quantity theory of money equations, what does P stand for?

Aggregate Price level

In the quantity theory of money equations, what does M stand for?

Money Supply

In the quantity theory of money equations, what does V stand for?

Velocity

In the quantity theory of money equations, what does Y stand for?

Real GDP

What is the definition of velocity in a Quantity Theory money equation?

It’s the amount of times dollars are being spent in a year

What is high velocity associated with?

A wealthy, expanding economy

What is low velocity associated with?

An economy in a recession and filled with contractions

What PV and VM stand for?

Nominal GDP

In the Quantity Theory of money, What does it state about the MS and PL?

It’s proportional in the Long run

What does Monetary Policy affects, AD or AS?

Aggregate demand

When an economy is at full employment, why is it that the Money supply won’t change rGDP in the long run?

It’s because of inflation

Deficit exists in a specific year, when the government does what?

More spending than taxes

Why does one subtract spending from revenue?

To figure out whether we’re in a surplus or in a deficit spending

When it Revenue - spending equates to 0, what does it mean about the revenue and spending?

It’s balanced

When the value of Revenue - spending is positive, what does it mean about the economy?

The government is running a surplus

When the value of Revenue - spending is negative, what does it mean about the economy?

The government is running a budget deficit

What is the definition of debt?

the total cumulative amount of money a government has borrowed and not yet repaid, representing the sum of all past annual budget deficits minus surpluses

When does a deficit happen?

It occurs when an entity’s—typically a government’s—total expenditures exceed its total revenues during a specific period

What changes the debt in an economy?

Taxes, government purchases, and transfer payments

What relationship does taxes have with deficit?

An inverse relationship

What relationship does Government purchases have with deficit?

It has a direct relationship

What relationship does transfer payments have with deficit?

A direct relationship

What is the crowding out theory?

increased government spending, funded through borrowing, raises interest rates, which reduces or "crowds out" private sector investment and consumption

What does an Increase in crowding out do to the AD curve?

It moves the curve to the left

What is the definition of crowding out?

It’s when increased government spending or borrowing reduces private sector investment and consumption

What is the goal of fiscal policy?

To stimulate the economy

Although, the goal of fiscal policy is to stimulate the economy, what does it leave with in the long-run?

higher national debt, increased inflationary pressures, and the "crowding out" of private investment

What are the long-run consequences of fiscal policy?

Crowding out

why is the long-run consequences of fiscal policy, crowding out?

It’s because sustained government deficit spending increases borrowing, raising interest rates and reducing private investment

What are the long-run consequences of Monetary policy?

Inflation

why is the long-run consequences of Monetary policy, inflation?

It’s because the economy is continuously increasing the money supply faster than economic output only boosts prices, not real production

Another way of saying Fixed unemployment is?

Natural Unemployment

What does Economic growth mean?

An increase in Potential GDP

When does Potential GDP increase?

It increases when there’s a sustained long term increase in GDP

Although, there’s an increase in the factor of production, what does it exclude?

It excludes it’s productivity or output per unit of input will increase

What causes Economic growth?

More resources, better resources, and technology

Another way of saying Productive capacity is?

Long-run economic growth

Economic growth shifts which curves?

LRAS and the PPC

Does a point from the inefficient point to the efficient point on the PPC, say anything about the economic growth?

No because economic growth is focused on the long-run economic growth not the short-run

Moving from an inefficient point to an efficient point on the PPC, represents what?

Short-run adjustment

Short-run increase in AD causes what will happen on the SRAS curve?

Upward movement along the SRAS curve

What is Public policy?

policies that the government takes to stimulate the long-run economic growth

What is the definition of Supply side policies?

These are government-driven strategies designed to increase an economy's productive capacity

An increase in the Supply side policies causes what to happen to the LRAS curve?

It causes the LRAS curve to shift to the right

What are some examples of Supply side policies?

Reducing regulation, Corporate tax cuts on business, and Income tax cuts

What are reduced regulations?

The government is reducing or eliminating rules, restrictions, and compliance costs on businesses

Corporate tax cuts cause an effect on what?

An increase in businesses’ after-tax profits and a reduction on the cost of capital

An increase in corporate tax cuts causes what to happen to LRAS?

It causes LRAS to increase