AP Macro Unit 5

shows the tradeoff between inflation and unemployment

→ in general, there is an inverse relationship unemployment and inflation

when the economy is overheating, there is low unemployment but high inflation

→ higher expected inflation shifts SRPC to the right

increase in unemployment and inflation

in the long run, there is no trade off between inflation and unemployment

→ the LRPC is vertical at the Natural Rate of Unemployment

point on SRPC moves along the curve

whole SRPC curve shifts

money supply and price level in an economy are in direct proportion to one another

M = money supply

V = velocity

P = price level

Y = quantity of output (Real GDP)

→ assume the velocity is relatively constant because people’s spending habits are not quick to change, and that output (Y) is not affected by the quantity of money because it is based on production, not the value of the stuff produced

→ short-run spending eventually leads to higher resource prices and inflation

→ if inflation is bad enough, banks don’t lend and the economy tanks

→ MS↑, nominal interest rates↓, investment spending↑, AD↑, SRAS↓, PL↑, demand for money↑

when annual government spending and transfer payments are greater than tax revenue

when annual government spending and transfer payments are less than tax revenue

the accumulation of all the budget deficits over time

→ if the government increases spending without increasing taxes they will increase the annual deficit and the national debt

money has no real effect on equilibrium

real output↑, price level↑, interest rates↓

real output no change, price level↑, interest rates indeterminate

real output↓, price level↓, interest rates↑

real output no change, price level↓, interest rates indeterminate

AD↑, real GDP↑, PL↑, budget towards deficit, national debt↑

AD↓, real GDP↓, PL↓, budget towards surplus, national debt↓

AD↑, real GDP↑, PL↑, towards deficit, national debt↑

AD↓, real GDP↓, PL↓, towards surplus, national debt↓

less economic growth because investment falls, less capital stock

→ demand increases

→ real interest rate increases

→ private investment decreases

the adverse effect of government borrowing on interest-sensitive private sector spending

sell bonds, increase reserve ratio, or increase discount rate

→ ir↑, bond prices↓

→ MS↓, bank reserves↓

→ quantity of loanable funds demanded by private sector↓

→ AD↓

buy bonds, decrease reserve ratio, or decrease discount rate

→ ir↓, bond prices↑

→ MS↑, bank reserves↑

→ quantity of loanable funds demanded by private sector↑

→ AD↑

the real GDP divided by the population

the change in real GDP per capita over time

( 1 ) Economic System

( 2 ) Rule of Law

( 3 ) Capital Stock

( 4 ) Human Capital

( 5 ) Natural Resources

output per unit of input

machinery and tools purchased by businesses that increase their output

( 1 ) Education/training spending

→ increases human capital

( 2 ) Infrastructure spending

→ increases physical capital

( 3 ) Production/investment incentive programs

→ increases physical capital

government policies designed to increase production by reducing business taxes and/or regulations

( 1 ) Providing tax breaks to businesses might disproportionately benefit the wealthy

( 2 ) It assumes that corporations will spend tax cuts on investment rather than pay out shareholders

anything that changes the natural rate of unemployment (LRAS)

the average number of times a dollar is spent and respent

an increase in money supply doesn’t change the amount of physical capital in the economy or the real output that can be produced

a budget deficit is the amount that the government overspends in a year, while the national debt is the total accumulated debt over the years from deficit spending

future spending falls because the government must pay interest on the debt and will not have funds for alternative uses

( 1 ) Technology

( 2 ) Amount/quality of physical capital

( 3 ) Amount/quality of human capital

AD, SRAS, and LRAS shift to the right