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

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