AP Macroeconomics Unit 5 Overview: Long-Run Consequences of Stabilization Policies

Overview

• Focus: Understanding long-term effects of fiscal and monetary policies on the economy.
• Purpose: Deepen understanding of economic functions and return to equilibrium.

5.1 Fiscal and Monetary Policy

• Tools: Handy chart and graphs.
• Goal: Analyze actions during recessionary or inflationary gaps.
• Concept: Fixer-upper of the economy.

5.2 The Phillips Curve

• Concept Introduced: Phillips Curve - relationship between inflation and unemployment.
• Short-run trade-off: Choose between inflation or unemployment.
• Long-run: No trade-off; Long Run Phillips Curve is vertical.

5.3 Money Growth and Inflation

• Key Theory: Quantity Theory of Money.
• Velocity of money: Frequency of money exchange, not a physics concept.

5.4 Deficits and the National Debt

• Topics: Federal budget, budget deficits, national debt.
• Policies:
  • Fiscal Stimulus: Government uses expansionary fiscal policy.
  • Fiscal Restraint: Use of contractionary fiscal policy.
  • Considerations: Balanced budget vs. financing spending.

5.5 Crowding Out

• Deficit Spending Effects: Increased national debt, crowding out effect.
• Crowding Out: Higher government borrowing leads to fewer private loans, raises interest rates.
• Consequences: Decreased consumer spending, potential recessionary gap.
• Practice: Expansionary policy on borrowed money requires a balance.

5.6 Economic Growth

• Indicators: Production possibilities curve shifts.
• Factors:
  • New technology
  • New resources
  • Human and physical capital

5.7 Public Policy and Economic Growth

• Connection: AP Government connection through public policy.
• Influence: Positive impact on productivity and labor force participation.
• Examples: Investments in education, infrastructure, R&D.
• Theory: Supply-side fiscal policies, including tax cuts, spur growth.

Key Terms to Review

• Budget Deficits: When government spending exceeds revenues.
• Consumer Spending: Household expenditures on goods/services.
• Contractionary Fiscal Policy: Reduces public spending to combat inflation.
• Crowding Out Effect: Government borrowing reduces private sector investment.
• Economic Growth: Increase in production, indicated by GDP rise.
• Equilibrium: Balance in market forces, stable prices/quantities.
• Expansionary Fiscal Policy: Increases spending/cuts taxes for growth.
• Federal Budget: Government's revenue/expenditure plan.
• Fiscal Restraint: Limits spending to control inflation and debt.
• Fiscal Policy: Use of spending/taxes to influence the economy.
• Fiscal Stimulus: Government spending/tax policies to boost demand.
• Human Capital: Skills/knowledge impacting productivity.
• Inflationary Gap: Economy's output exceeds potential, raising prices.
• Labor Force Participation Rate: Working-age population in labor market.
• Long-Run Aggregate Supply (LRAS): Total output at full employment.
• Long Run Phillips Curve: No long-run trade-off between inflation/unemployment.
• Monetary Policy: Central bank actions on money supply/interest rates.
• National Debt: Total government borrowing not yet repaid.
• Phillips Curve: Inverse inflation-unemployment relationship.
• Physical Capital: Assets like machinery/buildings used in production.
• Productivity: Efficiency of goods/services production.
• Production Possibilities Curve (PPC): Maximum output combinations.
• Public Policy: Government decisions affecting economic issues.
• Quantity Theory of Money: Money supply's link to price levels.
• Recessionary Gap: Actual output below potential, higher unemployment.
• Supply-Side Fiscal Policies: Increase goods/services supply for growth.
• Velocity of Money: Rate of money circulation in economy.