Chapter 14: Long-Run Consequences of Stabilization Policies
14.1 The Phillips Curve
- Monetary inflation: when prices increase due to oversupply of currency
- Purchasing power decreases
- Phillips curve: shows inverse relationship between inflation rate and unemployment
- Use aggregate supply and demand curves
- As AD curve shifts to the right → price level and unemployment increases
14.2 Money, Growth, and Inflation
- Rational expectations: theory that people learn to anticipate government policies that influence the economy, making the policies ineffective
- Government intervention is unnecessary and not useful to stabilize economy
- Umployment is temporary result of random shocks
- Inflation: sustained increase to overall price level
- High inflation for longer period of time → money growth
- Deflation: sustained decrease overall price level
14.3 Government Deficits and National Debt
- Budget deficit: federal government spending - tax collections
- In one year
- National debt: total amount of money that the federal government owes
- At any given time
- Ricardian Equivalency theory: deficit financing no different from tax financing
- Deficit financing → people increase savings to repay debt at layer time
14.4 Crowding Out
- Crowding out: decrease in real investment due to higher interest rates from government purchases
- Partial crowding out: if effect of crowded-out investments on RGP is likely smaller than inital increase in real GDP
- Complete crowding out: if decrease in investment removes entire boost in real GDP from increased purchases
14.5 Economic Growth
Economic growth: measured in terms of annual increases in real GDP or real GDP per capita
Reverend Thomas Malthus
- Food would grow at arithmetic rate
- Population would grow at geometric rate
- Eventually, population will exceed available food supply
What are the sources of economic growth?
- Increased investment in capital (human + physical)
- Improvement in technology
- Enhancing utilization of resources