AP Econ unit 5

the phillips curve

shows the trade off between inflation & unemployment

short run & long run phillips curve graph

when AD increases…

SRPC moves left to new point on curve NO SHIFT

(aka AD up → inflation up & unemployment down)

opposite occurs when AD down

When AS shifts…

SRPC shifts in the opposite direction

the expected inflation rate at any point on the SRPC when a loan was given out =

the inflation rate at the equilibrium on the graph

SRPC with a recessionary/inflationary gap graph

Quantity Theory of Money

M * V = P * Y

P=

price level

m=

money supply

v=

velocity

y=

output (GDP_R )

Assumptions:

1. velocity is relatively constant because people’s spending habits are not quick to change

2. Output (y) is not affected by the quantity of money because it is based on production

velocity definition

the average # of times a dollar is spent & re-spent in a year

neutrality of money

• changes in money supply only affect nominal variables not real production changes

• money printed by a government alone will impact inflation but not output

the federal budget

=tax revenues - gov purchases - gov transfers

entitlement spending

federal programs that require payments to any eligible person based on age/income/disability

MUST be paid

trade off for deficit spending is…

crowding out

growth rate

the change in GDP_R per capita over time

Productivity characteristics

1. physical capital (aka capital stock)

2. human capital

3. technology

4. economic system

5. rule of law

aggregate production function graph shows…

1. quantity of physical capital/worker

2. quantity of human capital/worker

3. state of technology

aggregate Production function graph

gov policies most likely to result in long run economic growth

1. education/training spending

2. infrastructure spending

3. production/investment incentive programs

supply-side fiscal policy

gov policies designed to increase production by reducing businesses’ taxes and/or regulations

why is supply-side fiscal policy controversial

1. providing tax breaks to businesses might disproportionately benefit the wealthy

2. it assumes corporations will spend tax cuts on investment rather than payout shareholders.