allow you to building unmute yourself in case you have a question okay all right so it's gonna start with we start with with a bit of a review here talking about fiscal and monetary policy action in the short run we've already touched on both of these right so unit three was fiscal policy and we did that on Tuesday last week and uniforms monetary policy a lot of times you'll be asked questions about physical and monetary policy together and so like we think about unit one supply and demand they like to ask double shift for questions right or they'll say you know consumer income increases and at the same time at the same time you know input costs go down and so what happens well if income rises demand increases and if input costs go down supply increases and so what's the result well the result is we don't know what happens to the price but we do know that output increases right so they'll do something similar with fiscal and monetary policy they'll say the Fed buys bonds so we know that that's an increase in aggregate demand and at the same time they'll say and they'll say Congress decides to cut taxes or Congress decides to increase taxes and that's gonna impact aggregate demand as well right so a lot of times the last double shift or tuck questions with the aggregate model so let's let's look at this this is talking about how physical monetary policy are used in conjunction with one another and we're seeing this right now right that to try and prevent us from for our economy from entering into a long depression we've seen the Fed come out and try and prop up the economy the best they can you've seen Congress writing checks to people and they're trying to is Congress in the Fed both trying to work hand in hand to try and prevent our economy from from slipping into like a 1930s type resetting type of depression and so this says suppose that there's already positive output gap so like inflation and then the government increases spending okay so what would that cause that would cause even more inflation right so this says what could the central bank do to prevent more inflation to keep interest rates stable so if Congress is increasing spending that's going to increase aggregate demand and so they're saying well what could the Fed do to prevent that from happening right to prevent area Tran from increasing to the point where we have too much inflation so somebody tell me what could the Fed do to prevent that from happening what open market operation anybody buy bonds yeah so it's it's it's sell bonds and so so again think about it here that if Congress increases spending that shifts average me into the right so if the feds trying to counteract that they want to shift average men back to the left and they do that by investment following you do that by interest rates going up you do that by decreasing the supply money by selling bonds right and so often what you see happening is that oh and it says it right here at the bottom - but often what will happen is Congress and the Fed will work hand-in-hand the federal act to kind of counteract Congress to prevent interest rates from rising or falling so this says assume there's a negative output gap it says what combined fiscal and monetary policies could close the gap so this is not new stuff right you know what Congress can do they can increase government spending or cut taxes and what could the Fed do well they're going to increase the supply money right which will lower interest rates and increase investment so how do they increase the supply money they buy bonds and they decrease the required reserve right they tell banks you don't have to keep as much on hand anymore and they decrease the discount rate and target a lower Fed fund rate so they also tell them if you drop lower a part you serve we're barely gonna charging the interest on over at loans that incentivizes banks to lend out the maximum amount possible and get as close as they can to that required reserve line ok so again it's not new stuff at all yet ok so they can ask you any of these questions they say what happens to the money supply interest rates bank loans price level real output unemployment budgets budget but do we move towards a surplus or deficit as the national debt I can asked about any of these things when there's a change in air inter command so when I was the money supply well we said we need to increase the money supply to lower interest rate so money supply increases interest rates drop when interest rates drop the result is more bank loans when aggregate wind shifts to the right we can see the price level rises on the x-axis we can see real output Rises if output is rising unemployment's falling right so what about these bottom two with an increase in government Spain spending and/or a decrease in taxes well we don't have a bunch of surplus right we have a budget deficit and that increases our national debt hopefully all that makes sense there are those eight things and probably more that that can be asked about when you have a shift in aggregate demand yeah we just did that okay so this says if a reduction in aggregate supply so this is a double shifter if you have a reduction in aggregate supply followed by an increase in aggregate demand which the phone will definitely occur so a reduction of aggregate supply let's just look at this a reduction of aggregate supply will increase the price level and reduce output right so price level up output down and then you have an increase in aggregate demand as well which is price level up output up so both of those happen simultaneously the price level is definitely gonna rise okay then the output is indeterminate it says which of the following combinations of fiscal and monetary will correct a severe recession so it's what's gonna fix a recession and so you have fiscal policy and monetary policy on here so how do you correct a recession well you're not gonna increase taxes that doesn't make sense right that would decrease our disposable income this is like saying we're in a severe recession right now because of coronavirus what can we do to fix it let's just raise everyone's taxes that is nonsensical right that just doesn't make sense so you're not going to increase taxes you would decrease taxes so C D or E and what are you going to do to the money supply well we need to increase investments and you do that by lowering interest and you lower interest by increasing the supply of money right so you're going to decrease taxes and increase the supply body so the bad news about these types of questions is you have to know fiscal and monetary policy to get it correct the good news is even if you will even if you just remember either fiscal or monetary you can eliminate a bunch right if you only remember fiscal policy you'd be like well it's not a or P so now you have a one in three shot if you only remember monetary policy you could eliminate all of them except for B d okay okay let's move on so that's the end of that first one we've got seven of these I'm gonna go through the first few pretty quick [Music] I'm gonna focus most of our time on the Phillips curve which were kinda introduced to here okay the Phillips curve okay it is a that this would be the next graph that we would have added to our big graph chart we would have done this like the week after spring break your y-axis is inflation and your x-axis is unemployment okay and so one thing that we've seen a lot throughout looking at the aggregate model is when you have a change in aggregate demand let's think about if aggregate demand shifts to the right the price level goes up and unemployment goes down you with me and if aggregate demand shifts to the left you have price level goes down and unemployment goes up and so inflation and unemployment those two economic evils are almost always going in opposite directions okay there's an inverse relationship there between the price level and unemployment in the short-run okay there is no relationship in the long run because in the long run what's our unemployment rate it's our natural rate right so in the short-run there's a trade-off between inflation and unemployment but in the long-run we're at our natural unemployment okay so your phillips curve you're gonna have these short run Phillips curve downward sloping showing the inverse relationship between inflation on the y-axis and unemployment on the x axis then you're gonna have your long run Phillips curve which is vertical hat the natural rate of unemployment so your x axis is the unemployment rate so in the long run your unemployment rate is constant right we're at that natural rate okay so this is you can look at this over the past you know 15 16 years it's pretty clear right it's pretty clear the relationship between the blue the blue is unemployment in red is inflation inflation measured by the Consumer Price Index and so you can see a pretty clear relationship between between these two economic evils that when we have like you can see what happened in a way right and oh wait we had on Spyke and what what happened to inflation whatever that happened well we had unemployment spiked and we had inflation drop as the Fed pursued some aggressive quantitative easing policies and then as and then what you what you typically see happen is these two working opposite directions now the reason why we did not see that whenever the unemployment rate fell during the Obama administration is because the Fed was continuing to pursue these expansion airy policies which kept interest rates are really really low and so historically we saw this pretty clear inverse relationship between unemployment and inflation until until the the recovery from the from the recession in which the Fed decided they were going to keep interest rates really low and not allowed them to adjust upward so here we go here's your graph now as I mentioned from the outset there's an inverse relationship between inflation and unemployment in the short-run okay you don't have to curve this I draw it linear that's why I always draw it so your short run Phillips curve is downward-sloping this shows that when we have a high rate of inflation we have a relatively low rate of unemployment and as that inflation Falls as that rate of inflation Falls the result is or not the result but the corresponding change in unemployment is that it will rise okay so when unemployment is high the rate of inflation simply low when unemployment is low the rate of inflation is really is is typically high okay so that's your trade off in the short run and you can see this trade-off with aggregate demand anytime aggregate demand shifts you have a change in inflation and a change in unemployment always in the opposite direction okay and so what I always encourage my my students to do every year is on the I feel like at this point of the year you should be very very comfortable with the aggregate model okay drawing the eirick model shipping i recommand windows shift a direct supply fiscal policy monetary policy long-run correction you should be solid on that stuff at this point okay so what I encourage you to do is use that aggregate model to to to frame the Phillips curve if that makes sense and so you can draw your aggregate model and if there's a change in like one of your multiple choice questions that that's on my AP is there's a change in net export so I think it says net exports decrease when it says if net exports increase what happens on the Phillips curve so if net exports fall that decreases our aggregate demand right and if our aggregate demand Falls if our aggregate demand Falls let's see if you can see this yeah so if nope dang it okay and for aggregate demand shifts to the left that drives us into recession right that's the price level going down and unemployment going up so if we were mmm hang on if we were right if we were right here okay look at the Phillips curve on the right if we were right here at these yellow dot it didn't net exports fall if net exports fall look at the aggregate model aggregate demand shifts left so our new equilibrium point would be where the where the cursor is the price level would be lower output would be lower so unemployment would be higher right so from here net exports fall our new equilibrium would be here so we have a lower price level and higher unemployment so on the Phillips curve we were here lower price level higher unemployment where would we go from here somebody tell me where we go from here on the Phillips curve which would show us lower rate of inflation higher unemployment where we go you right that's correct yeah so you would move down into the right and so if we move down into the right so if your new point is right here where the cursor is that would show lower rate of inflation higher rate of unemployment you with me and so it's really not new information it's just a different graph which shows the same information okay because you can see inflation on the aggregate model it's the y-axis rights that it's a change in the price level is inflation and you can see unemployment on the aggregate model that's your x axis is your gdp you with me and so if your gdp is falling that means we have a higher rate of unemployment which is on the x axis of your phillips curve okay so let's look this says show what happens on both graphs of aggregate demand increases okay so let's say that there's a decrease in income taxes there's a decrease in income taxes on the aggregate model aggregate demand will shift to the right okay when aggregate demand shifts to the right all you have to know to show the change on the Phillips curve is what happens to inflation what happens to unemployment so what happens to the price level if a grameen shifts to the right the price level goes up so weight an increase in the rate of inflation output Rises which means unemployment is falling okay so when aggregate demand increases you have an increase in the rate of inflation a decrease in the rate of unemployment and so you show that by moving up into the left on the short run Phillips curve does that make sense so what you're gonna notice here whenever we have the aggregate model and Phillips curve side-by-side they're always moving in opposite directions for example aggregate demand shifted to the right and where'd we go in the short Globes curve we went to the left okay that first example I gave you of aggregate demand shifted to the left the result was we move down into the right the reason why they go in opposite directions is because your x axes are basically opposite right on your phillips curve it's unemployment and on the aggregate model as you move further to the right it's showing an increase in employment you with me so because your x axes are opposite they're always gonna move in opposite directions okay so hopefully that makes sense so I think I have a couple more examples here yeah so what's in this it says correctly draw the long run Phillips curve and short run Phillips curve with a recessionary gap so with the recessionary gap you're getting your long run Phillips curve vertical at the natural rate just like with the aggregate model your long run Phillips curve is just your reference line get your reference line so if we're in disequilibrium over here if we're not in the long run we're not gonna be in the long run here either and if we're to the left over here we're going to be to the right of the long run Phillips curve okay again because your x axes are opposite so here is your Phillips curve which corresponds with the aggregate model that you see here showing the recessionary gap you have the long run Phillips curve vertical at the national rate just like you have been longer an aggregate supply showing output when we're at our natural rate on the aggregate model we see a recessionary gap which shows that we have a lower price level and if we were healthy in a higher rate of unemployment and on the Phillips curve we have a lower price level than if we were healthy and high rate of unemployment so again it's the exact same information okay it's just a different graph which shows that information and then it says what happens when aggregate demand Falls while we're already in a recession if aggregate demand Falls even further that means that we're gonna have a further decrease in the price level and a further increase in the rate of unemployment so we move down we ship our a great demand curve to the left lower price level higher unemployment so the lower price level higher unemployment on the Phillips curve would be moving down and to the right which again you can see on the y axis on the Phillips curve this shows a lower rate of inflation and a higher rate of unemployment on the x axis cool so this is any questions so far I'm going to wait five seconds okay so that says so what we just looked at was we looked at how the Phillips curve changes when there's a change in aggregate demand right so starting here if there's a shift in aggregate demand we just move along the existing short run Phillips curve right there's a shift to the right of aggregate command we move up into the left on the Phillips curve there's a shift to the left of aggregate command we move down into the right on the short run Phillips curve so always going in opposite directions and when aggregate demand shifts there's an inverse relationship there between the change in inflation and the change in unemployment when there's a change in aggregate supply something different happens and again this isn't something you have to memorize you can see what happens on the aggregate model and then all you have to do is show that change on the Phillips curve okay so let's look this says what happens when aggregate supply Falls so if aggregates flight decreases let's say that let's say the price of oil rises okay there's basically only one place the price of oil can go right now we're down to like 23 bucks a barrel or something so if your folks are in the one gas industry it's kind of a scary time well if the price of oil rises let's say that you know that Russia Saudi Arabia decided okay we will withhold our supply a little bit to try and stabilize the price of oil if that happens aggregate supply will shift to the left whenever oil prices rise when that happens what happens to the price level well when aggregate supply shifts to the left what is this called we have a simultaneous increase in the price level and increase in unemployment which is called what someone said that equation a very good several nice stagflation or cost-push inflation okay so how would you show this change on the phillips curve how would you show an increase in the price level and an increase in unemployment well from here if you just move up to the left that shows an increase in the price level but it would show a decrease in unemployment so you can't do that if you move down into the right it shows an increase in the unemployed but a decrease in the price level so you can't just move along the existing short run Phillips curve if aggregate supply shifts so again if aggregate demand shifts like we saw in the previous couple slides of aggregate demand shifts inflation and unemployment are moving in opposite direction so you can just move along the existing short Phillips curve if aggregate supply shifts either to the left or to the right inflation and unemployment are changing in the same direction which means you can't move along your existing Phillips curve you have to shift the entire Phillips curve okay so from the yellow dot on the aggregate model to the green dot Agri supply shifts to the left so the way you show a simultaneous increase in the price level and unemployment is your short run Phillips curve is gonna have to shift to the right which shows that at each point of inflation the rate of unemployment is higher okay so again you can see I'm moving in opposite directions that arrows flashes to the left short run Phillips curve shifts to the right they'll always go in opposite directions because your x axes are opposite ideas once employment and once basically employment okay so let's look at this we have a negative output gap okay we have a recession what happens when Agri supply increases okay so if you were to draw this recessionary gap on the Phillips curve you'd have your long run Phillips curve which is your reference line you'd have your short run Phillips curve downward sloping and you would show that we have a high rate of unemployment so it would look like this okay high rate of unemployment unemployment is greater than our natural rate what happens if aggregate supply increases well the aggregate supply increases look at your let look at your aggregate model if aggregate supply increases what happens to the price level it falls whatever it's the output it rises so unemployment Falls so again if we're looking at the Phillips curve the only things that we care about are the change in inflation and the change in unemployment okay so if aggregate supply increases you have a simultaneous decrease in the price level and decrease in the rate of unemployment and the only way on the Phillips curve the only way to show both falling the both decreasing at the same is shifting your short run Phillips curve to the left does that make sense because if you were to move downward along this curve to show a decrease in the rate of inflation you'd be showing an increase in unemployment and that's not what's happening on the aggregate model if you were to move to the left on the existing curve to show a decrease in unemployment you'd be showing an increase in inflation which is not happening on the Filip on the aggregate model so the only way to show what's happening on the aggregate model which is that the price level and unemployment are both falling is a shift the entire Phillips curve to the left cool does that make sense so I don't think the Phillips curve is that complicated I really don't it's it's the exact same idea it's exact same concept as the aggregate model it's just showing the relationship between inflation and unemployment and that it's not new information you can get that same information from the aggregate model so what I'd encourage you to do if you feel like your comfort with the Ariat model which hopefully you are at this point what I'd encourage you to do is what I encourage you to do is to show the change on the aggregate model it didn't take that information to extract the information of the change in inflation unemployment and then show the change on the Phillips curve okay um yeah we got it well let's let's go back to this real quick okay so side by side Agra model Phillips curve agron model on the left Phillips curve on the right if there is a shift to be right on aggregate demand you move up into the left on the short run Phillips curve this C is kind of on the Seas down there it's awkward okay so of aggregate demand shifts you move along the short run Phillips curve in the opposite direction okay so if I gotta make shifts to the left you move down into the right on the short run Phillips curve if there's a change in aggregate supply if it shifts to the left you have the entire short run Phillips curve has to shift to the right to show an increase in inflation and unemployment at the same time okay and then if it shifts to be if on the aggregate model are slight shifts to the right you shift you shift the short run Phillips curve to the left so aggregate demand shifts you move along to shorten Phillips curve aggregate supply shifts you have to shift the entire Phillips curve okay and again will always go in opposite directions okay so short and close curve shows an inverse relationship between inflation and unemployment got it an increase in aggregate demand will cost which of the following okay they love this though I know you don't have multiple choice questions this year but they love to ask questions like this they'll say if there's a change in average man how does that change the Phillips curve okay so it's imperative that you know how to connect these two graphs together I wouldn't be surprised if if if you if they ask you questions about the aggregate model and the Phillips curve on the free response in May I again I don't know what it's gonna be like but I because of the two most important graphs I think that you're gonna have I think they're gonna ask about aggregate model Phillips curve in the money market graph my gut to my gut tells me it's gonna be those three so this says if there's an increase in aggregate demand what's that gonna change okay so the aggregate demand increases that's an increase in the price level and a decrease in the rate of unemployment so there's an increase in the price that will decrease in unemployment let's look here okay we're on the aggregate model you have a wait what did say happen average man increase so if you've an increase in aggregate demand increase in the price level decrease in unemployment so over here in the Phillips curve increase in the price level decrease in unemployment is a movement up into the left and there'd be a higher price level lower unemployment okay so you would have a movement along a given short run Phillips curve so your answer would be a so it's not see a lot of people want to put C because they're like oh shorten Phillips curve shifts to the left it doesn't shift okay you just move along the curve the only way to Phillips curve shifts is if there's a change in the aggregate supply that's a change in aggregate demand you don't shift anything on the Phillips curve we just move along to Phillips curve okay um let's see anything else here's an example of a free response question it says the economy is currently in a recession draw a correctly liberal graph of the short run and long run Phillips curve showing that we're in our session so you would draw your see if I have this year you would have your I'm just going to draw for you okay if we have a recessionary gap on the Phillips curve it's going to look like this longer fields for inflation unemployment short run Phillips curve okay so here is your okay so here's your Phillips curve right here okay so that's your Phillips curve so if we are in a recession that means that we have high unemployment or high inflation someone tell me we've a recession is that high unemployment or high inflation high unemployment they're good as women so which of those a B or C which shows a higher rate of unemployment man if we were healthy it's C yeah I think B shows we're healthy you can clearly see a shows a higher price level than if we were healthy so that's an inflationary gap C is to the right of that Phillips curve of the longer and Phillips curve indicating that we have a higher rate of unemployment than what is normal so if you were to draw the U Phillips curve showing that we have a recessionary gap you would draw this with point with a point at point C you would not put points a and B okay but that would be your Phillips curve showing a recession okay it didn't so that's on a on B it says draw correctly labeled graph of the aggregate model and show long-run so that's just drawing your aggregate model of the recession okay then it says to balance the federal budget the government decides to raise taxes while maintaining the current level of government spending so if they do that if they raise our taxes without changing government spending that's gonna decrease as possible income and decrease aggregate demand because of a decrease mark there suppose for income right and consumption so aggregate demand falls directly and falls that would be a decrease in the price level and an increase in the rate of inflation okay which is going to move us along that existing short run Phillips curve okay so let's move to the next let's move to the next one here they're not all going to take that long I promise but that we had to spend plenty of time on the Phillips curve since that's new and it's super important this is long-run consequences of stabilization policies I don't know if I want to do this one yet we're going to double back and do the quantity Theory money here in a little bit now we'll get you out of the way okay yeah so let's look let's see let's look at routing out so we've talked about crowding out already what graph do we use to show crowding out you remember money market say so not the money market it's the other money one is the lone wolf on scrap so the loanable funds graph is what we use to show crowding out okay so crowding out occurs when Congress deficit spins when Congress deficit spending well if we're in a recession what are Congress's options if I'm a recession what can Congress do increase government spending lower taxes yep those are the few options increase government's believe in lower tax if they do either one of those things or both the result is they're running a deficit so if Congress is deficit spending we show that change on the loanable funds graph by it's no longer just consumers and firms demanding loans but consumers and firms and the government so you can show this with an increase in the demand for loanable funds if Congress is deficit spending which leads to higher interest rates and the reason why we care about this is higher interest rates leads to less investment and the biggest issue with less investment spending is we'll have fewer capital goods which slows down our economic growth okay so there you can show crowding out two ways you can either show it by when Congress decides to borrow money it's an increase in the demand for loans or when Congress I borrowed money it decreases the banks supply of loanable funds because some of us pull our money out of savings to buy those government bonds okay so either a decrease in banks supply or an increase in the demand for loanable funds either way we results in an increase in interest rates okay and again the important thing here is that increase in interest rates decreases investment spending right firms don't want to borrow as much when interest rates are high and the reason why that's a bad thing is when firms stop borrowing and spending we have fewer capital goods and when we have fewer capital goods it slows down our economic growth okay so that is crowding out I think that's all I want to talk about that it's it should be a review for you we talked about crowding out in unit four when we looked at at monetary policy and how the Fed tries to counteract crowding out so they like to ask questions about that that if Congress says hey we're gonna spend a ton of money the Fed knows well if if we don't do anything the result is eventually going to be an increase in interest rates which is going to lead to lower investment spending and so the Fed tries to counteract that by buying bonds or lowering the required reserve this kind of rate Fed fund rate whatever to try and decrease interest rates to try and stabilize interest rates a little bit to prevent that crowding out from occurring so says crowding out refers to the decrease in investment due to increased borrowing by the government an increase in the government budget deficit is most likely to result in an increase in which of hawing well if they increase their budget deficit they're borrowing more money increasing the demand of money which increase or increase in the demand of multiple funds which increases the interest rate which is C okay so again I went through that pretty quick but crowding out should be should be review for for you guys let's see if I want to see what I want to do next I don't even think I want to do that one let's go to suit the sixth one as we have three left yeah we've already seen this so just real quick remember that remember how you show economic growth on the on your graphs you shall economic growth why if you go all the way back to like August you show economic growth by the production possibilities curve shifting outward right and on the aggregate model the production possibilities curve is the exact same concept that's the long-run aggregate supply curve so here you have your aggregate model and your production possibilities curve so if investment increases if investment spending increases what's going to happen well if investment increases in the short-run this is an increase in aggregate demand but in the long run we have more capital goods and with more capital remember you're factors of production related labor capital entrepreneurship so there's an increase in capital everything else equal it's going to increase our economic growth and it's gonna shift our production possibility for about learn okay so the short-run you have an increase in aggregate demand because investment is part of aggregate demand okay eventually you're going to increase an aggregate supply because firms have more capital goods and when they have more capital goods it increases your longer an aggregate supply or your real output at full employment will increase and on your production possibilities curve you show economic growth with the shift outward up the production possibilities curve okay okay so that's it with that Kannamma growth that's new that's old old old stuff [Music] so they do ask about supply-side policies from time to time so this is public policy and economic growth and the policy measures that Congress can take to try and to try and encourage economic growth it says what government policies will most likely result in long-run economic growth so long-run economic growth is driven by is driven by by capital goods and capital goods is driven by investment spending which is thrit which is business is spending so the policies that promote economic growth are policies which are which are pro-business and Pro competition ok and so what policy is result in long-run economic growth this is anything which will promote improvement in the quality of land labor capital entrepreneurship or anything what that will import that will increase the quantity of land therefore capital entrepreneurship so education and training spending okay education and training spending to make our human capital better right to make our workforce more productive infrastructure spending on public works like roads bridges and harbors this makes it easier to do business right it makes it easier to do business and the result is trucks break down less frequently we're a lot more efficient moving goods across the country and then production and investment incentive programs and this these are the kind of pro-business policies which Congress can take which will encourage business creation and increase innovation and increase productivity and so this is an investment tax credits or or or lowering the corporate tax rate anything which is more business friendly will result in more economic growth everything else equal again we've talked about trade-offs that's the entire class is about trade-offs right so there are trade-offs with this as well decreasing the corporate tax rate is good for economic growth but we'll also AG less tax revenue which means that we either have to have a simultaneous decrease in government spending or we're gonna run an even bigger deficit than we are right now just hard even comprehend running a bigger deficit than we are right now but it all comes down to trade-offs right we can encourage more economic growth which has widespread positive implications for everybody in the United States especially the lowest income people but the problem with that with it gets to a certain point where we don't have tax revenue to fund to fund our public goods there's no supply-side fiscal policies you do need to know about this could be on your free response as well and so this is government policies designed to increase aggregate supply so when we talk about fiscal policy and monetary policy all of that is trying to try to impact an economy from the demand side right so it's either okay we're in a recession how can you how can we get ourselves out of the recession increase thinning decreased taxes both of those are demand side policies or what can the Fed do well they can pursue policy actions which will increase investment spinning through a decrease in interest rates again that's a demand side policy so the other way that you can correct that recessionary gap is with supply-side policies so anything that makes firms want to supply more okay so it's government policies designed to increase production by reducing business taxes or by reducing regulations so something interesting that we're seeing right now in the midst of all this chaos is government is trying to figure out how can we make things easier for businesses right and so they're doing things like they are I mean there's silly regulations which like you know hey you're licensed to do surgery in the state of Oklahoma that means that you know what the heck you're doing but you can't do those exact same surgeries that can drive two miles south or a couple hours south to Texas like the human body is different in Texas or something so you're not equipped to do surgeries down there even though you can do them like an Ardmore like that makes no sense right so there's a lot of licensure laws that say just because your license to do something on one state doesn't mean you can also do that in a different state well that literally makes no sense and so there are these regulations that are put a place which makes it more difficult to do business which now that we're in the midst of all this chaos and the you know government's like we've got to make it easier for people to do business because otherwise all these businesses are going to go bankrupt and so they're losing these regulations which are more burdensome and really serve very little purpose and the result is it makes it easier to do business and so this isn't the same wish that zero regulations again it's about trade-offs right and so there are a lot of regulations which are bourbon some which could be completely eliminated and the result would be faster economic growth and there are some regulations that if you got rid of them it would be not good and we'd have a lot more pollutants and and it would be a net loss for society so it's just a matter of figuring out what are those regulations that we can kind of get rid of or that we can loosen a little bit and what which are the ones that we need to keep in place and so those are those are the supply-side policies so of course it's controversial because we don't like the idea generally speaking people don't like the idea of giving tax breaks to businesses because business owners are disproportionately middle and upper class and so it's somewhat controversial because we don't like the idea of the benefits going to the middle and upper class we want the benefits of policies going towards the lower class primarily and the other thing is it assumes that corporation is going to spin those tax cuts to benefit businesses rather than just to pay out their shareholders and so what you're seeing happen with with the government giving money to businesses right now through small through the SBA loans the Small Business Administration loans is they can't they come with strings attached like and in same with the airline's like the airline industry just got like fifty billion dollars or something ridiculous but it comes with strings attached right so they're telling these airlines we're gonna give you fifty billion dollars that you guys don't know completely bankrupt but you can't just use this fifty billion dollars to increase CEO pay or to do stock buybacks or something like that and so it comes with these these strings attached in order to try and encourage these corporations to spend the money in a way that's actually going to help the economy rather than just lining their own pockets which is something that we saw an issue with during the bank bailouts of after the Great Recession in oh wait oh nine in 2010 and so supply-side policies are are complicated will it result in economic growth the answer is almost certainly yes are the trade-offs worth it I don't know it depends right it largely depends and and if you can if you can attach strings to to these supply-side policies that incentivize businesses to act in the way that you want them to act and often it's it's it's the best way to spur economic growth okay so those are supply-side policies all right so let's go back to the last thing I'm going to hit on today then we'll be done I know this one's this one's gonna go a little bit longer than than ones then pass but it's new stuff so it's that's probably appropriate okay the quantity theory of money is something that we touched on in past okay so the general idea with the quantity theory of money is that everything else equal if the only thing you do is increase money in people's pockets you're gonna have a proportional increase in the price level this was the argument against the universal basic income with yang giving everyone a thousand dollars a month forever yeah regardless of income level the the argument against that is that if you have an increase a consistent increase in the quantity of money with no other changes everything else equal you will have a simultaneous increase in the price level to where yes everyone will have an extra thousand dollars from their pocket every single month but when you have a simultaneous increase in the price level of the exact same amount in real terms right back to where we started and so if you give every single American an extra 10 grand right now well the result is you're gonna have a site you're going to have a proportional increase in the price level to where eventually in real terms were right back to where we started is we have ten thousands more but everything costs a proportional there's a proportional increase to where it doesn't really impact us in real terms if that makes sense and so that's the quantity theory so know what I'm just thinking okay so here's your quantity Theory money it is MV equals py or what you'll see is MV equals PQ you'll see both of those MV equals P Y or MV equals PQ okay so let's break that down M is the money supply P is the price level okay V is the velocity of money so the velocity of money is the speed at which we are spending money the speed at which we're spending money okay so like if there's one trillion dollars in the United States and those dollars are spent three times per year on average use your numbers I'm making up that means that the price level times the quantity of output the right side of that equation is three true is three twenty three trillion dollars right it's the money supply the trillion times the velocity of three is three trillion dollars which is the price level times the output or GDP okay and so that's your equation it's really pretty simple what what you'll see on the multiple choice questions that that I went through today that'll be released to you in like five minutes on the my AP website is they'll say everything they'll see gold there's an increase in the money supply what happens to the price level and it's okay so if one thing on the left side of the equation goes up what something's gotta happen on the right side of the equation something also has to go up right for this for this to continue to balance okay so P times y is nominal GDP or you'll often see P times Q is nominal GDP is the price times the quantity right that's the expenditure approach it's the total amount that we are spending so that's your nominal GDP which equals the amount of money in circulation times how many times we spend the money okay so this says assume that velocity is relatively constant because people's spending habits are not quick to change where people are relatively consistent with how they spend their money based on their their income level and we assume that output is not affected by the quantity of money because it's based on production not the value of the stuff that's produced okay so in the short run we assume that velocity is constant and the output is constant as well and so the only things that are subject to change in the short round are going to be the money supply and the price level so this says that the government increases the amount of money in what's gonna happen to prices P well if we assume velocity and output are the same if the amount of money goes up we assume that prices will go up as well okay both sides of the equation have to change in the same direction okay so this says assume that the money supply is five dollars and it's being used by ten products with a price of two dollars each okay so if the question says how much is the velocity money well we have three of these four variables in place here so it's one-step algebra to solve so if the money supply is five then we're trying to solve for the velocity money is five times V equals the price 2 times the quantity 10 so 2 times 10 is 20 and if the money supply is 5 that means the velocity money must be 4 5 times 4 equals 2 times 10 okay hopefully that makes sense and then number 2 it says that the velocity and output stay the same so V and Y stay the same what will happen if the amount of money increased to 10 that means that these supply money doubled from 5 to 10 which means that the which means if the velocity and the quantity are constant it means that the price must double as well so if that goes up to 10 if it doubles from 5 to 10 the price must double from 2 to 4 that makes sense everybody so again there's just four variables and all college portal do is they'll ask you don't usually they'll give you three and the four variables like they did on on this first example or they'll say everything else equal there's an increase in the money supply what happens to the price level or what happens to nominal GDP and that's just the other side of the equation whoops so this has given a constant velocity of money in the short run a 5% increase in the money supply will translate to a 5% increase in what so the velocity of money that's the left side of the equation if the velocity of money is constant and there's a 5% increase in the money supply there's a 5% increase on the left side of the equation there's a 5% increase on the right side of the equation and the right side of the equation is your GDP okay the right side of the equation is your nominal GDP price times quantity okay so there's a 5% increase in the money supply there's a 5% increase in nominal GDP which is the right side of the equation okay and this says hyperinflation is usually caused by what this is just the quantity theory of money like in principle if there's hyperinflation is typically caused by a continuous expansion of the money supply to finance government budget deficits okay which is kind of what we've been engaged in over the past couple of decades is a continuous expansion of the money supply to finance government budget deficits and so will we eventually have hyperinflation I don't really know people seem to think that the United States economy is invincible and that we're never going to be faced with hyperinflation we're not we're not we're not it we're still susceptible to economic to economic the economic powers that that impact on the other economies and so you know back in the 70s we saw inflation double-digit inflation and so it's impossible that that comes back United States sure of course that's possible and so you know it's people think that you know the Keynesian side of things says if we just put the right levers if we pull the right fiscal and monetary Leverett levels levers that we can control the economy that's that that political cartoon of the government with the two tool boxes trying to you know use fiscal and monetary policy to adjust the flow of economic activity and so maybe maybe we have those levers that are exposed which which we can use to control the economy but as we've seen many many times throughout history there are unintended consequences where with any policy actions that we take so hopefully this kind of makes sense to you the biggest thing by far today is that you're comfortable with the Phillips curve I'm gonna upload this video to YouTube and so if you want you can go back and watch the Phillips curve portion Clifford has some good stuff on the Phillips curve if you wanted to look if you just search for ac/dc ac/dc economics Phillips curve I'm sure he's got plenty of stuff on there and so I encourage you to do that as well on Thursday we're gonna start micro so we're gonna start the micro review I'm not going to go over macro unit 6 which is which is the foreign sector and how the foreign sector impacts our economy I think it's super interesting I'll probably end up doing a video on that or resume on that at some point which you know if all you care about it if you're like I don't really care just teach me what I need to know to pass the AP test that's fine don't join that zoom because you don't need to know that stuff for the AP test but I still probably will do that one just that you have a more complete understanding of the macro economy which would be really helpful if you end up taking an economics course in college knowing how the foreign sector ties things that the United States economy as well so I will do a video on that at some point it won't be like a tuesday thursday 10 a.m. it'll be a different time and if you want to join that you're welcome to do that and i'll send that link in the group but that's all i have for for today does anybody have any questions about the Phillips curve anything that I can clear up before we're done text me send me a message and the group me email me if you have any questions when you're going through this stuff several you have been doing that as you go through the multiple choice and free response questions so please feel free to continue to do that I'm here to help you and to try and prepare for the AP test as best I can from my home I will tell you on the on the free response question the key was wrong went back at the end and corrected corrected one part but Part II on the free response question there's only one for response question day in 21 multiple choice but Part II I think on the free response was wrong the key was it's a shift of the Phillips curve so be careful on that one whenever if you go through and do that they have a really good day today I'll be honest I I missed some of you I miss being in front of you and you know Jack them around and cracking jokes and you all making fun of me and me making fun of you guys and I don't know I kind of miss that so I hope you're all doing well if I can do anything for you don't hesitate to reach out and let me know have a good Tuesday I'll talk to you soon