hi everybody job breed here from reviewe eon.com today we're going to be looking at unit five for macroeconomics this unit is all about long-term consequences of monetary and fiscal policy actions these videos go alongside the total review booklet from reviewe eon.com if you're interested in supporting reviewe eon.com head down to the links below also don't forget to like And subscribe let's get into the content now most of unit 5 takes old things you've already learned in previous units and applies it in new ways so it can be a little bit tricky but if you really understood it the first time around it's not too bad the first thing we're going to look at is the interaction between monetary policy and fiscal policy actions if we have expansionary monetary policy and expansionary fiscal policy on the Asad model let's see what the impact is going to be since expansionary fiscal policy will increase government spending or increase consumption that will shift that aggregate demand curve to the right causing the price level to increase and real output to increase if we have expansionary monetary policy that means lower interest rates which increases gross investment that increase in Gross investment will also shift that aggregate demand curve to the right pushing that price level up again and increasing real output again since both actions shift that aggregate demand curve to the right we know that the aggregate demand curve will definitely shift to the right that means the price level level is going to increase real GDP output is also going to increase and the unemployment rate will decrease as a result because there's an inverse relationship between real GDP and unemployment but when it comes to interest rates we're going to see a conflict here monetary policy is going to give us a lower interest rate if we have a scarce Reserve System we're going to see an increase in the money supply which decreases the interest rate or if we have an ample Reserve System we'll see a decrease in the interest on reserves rate and that will result in a lower policy rate but expansionary fiscal policy results in more national debt and that means an increase in the demand for loans or a decrease in the supply of loanable funds and as a result in the loanable funds Market we're going to see an increase in the interest rate so when it comes to expansionary monetary and fiscal policy interest rates are going to be indeterminate as far as gross investment is concerned we also can't determine that because investment is often determined by the interest rate and since we don't know how much investment there was we also can't determine if there was an increase or decrease in the growth rate as a result of the these two combined policy actions little side note all of these things would be the opposite if we had contractionary monetary policy and contractionary fiscal policy so what happens if monetary policy and fiscal policy go in opposite directions well let's take a look if we have contractionary monetary policy and expansionary fiscal policy here's the impact on the Asad model first of all the contractionary monetary policy will increase the interest rate decreasing gross investment and that will shift that aggregate demand curve to the left the expansionary fisc policy will increase government spending or decrease taxes and that will increase the Agri demand curve so what's the net effect well since the aggate demand curve is both shifting left and right we can't really determine the price level or the real output as a result so as we just saw in that Asad model the combined actions of monetary and fiscal policy working in opposite directions means that aggate demand curve is indeterminate as a result the price level is also indeterminate and the real output is indeterminate along with the real output the unemployment rate will be indeterminate as well we don't know if it's increasing or decreasing now here's the impact of those contradictory policies on the interest rate that contractionary monetary policy is definitely going to increase interest rates in the money market that's if there's scarce reserves and if there's ample reserves we're going to see an increase in the policy rate as well on the loanable funds Market we're going to see an increase in the demand for loanable funds that's because the government must borrow more money in order to have that expansionary fiscal policy and that will also increase the interest rate both of these actions are increasing the interest rate and that means that the interest rate is for sure going to increase that gross investment is for sure going to decrease because there's an inverse relationship between the interest rate and the quantity of investment within an economy and as a result of that decrease in investment there's going to be a decrease in the growth rate within this economy the next thing we're going to look at is the long run impact of an increase in the money supply if the money supply increases that's going to decrease the interest rate in the money market that will increase the gross investment within an economy shifting that aggregate demand curve to the right so what's going to happen in the long run as a result of that increase in aggregate demand well as you can see that price level just increased that means that wages are going to have to increase in the long run as well as the prices of other resources when that occurs that means that we will have higher costs for businesses that increase in production costs is going to shift the short run aurate supply curve to the left in the end we end up right back at the same equilibrium output we had at YF there and we have a higher price level there at pl2 what this tells us is when there's an increase in the money supply in the long run there will be no change in real output but we will have an increase in the price level the other thing we need to know for this topic is called the monetary equation of exchange we have an equation here and it's MV equals py here's what those variables represent M first of all is the money supply V is the velocity of money velocity of money is how many times a dollar gets spent on average per year the third variable is p that's the abbreviation for price level and why is real income also known as real output or real GDP the important thing to know is that both sides of this equation equal nominal GDP the money supply times the velocity of money will equal nominal GDP and the price level times the quantity of real output will also equal nominal GDP here are a few implications we have from this form formula if we assume that there's a stable velocity of money and a stable price level then an increase in real output will require an increase in the money supply both of those changes will increase nominal GDP if we have a stable price level and a stable real output it's also possible to increase the money supply as long as the velocity of money decreases questions you might get for this equation aren't too tricky as long as you remember the formula and remember both sides of it equal nominal GDP the next topic we're going to look at is the differences between the national deficit and the national debt the national debt is a concern for a lot of people and it is the accumulation of all previous surpluses and deficits right now the national debt is over $27 trillion and it keeps on climate a budget deficit occurs when the government's taxes are less than government spending when that occurs the national debt Rises a budget surplus on the other hand occurs when tax revenue is greater than government spending those will decrease the national debt so what's the bigal deal about the United States national debt and our current deficit well it's this thing called crowding out crowding out occurs when we have a budget deficit it causes interest rates to increase it causes a decrease in Gross investment and with that we will have less Capital formation and that lower amount of capital formation decreases economic growth there are two ways to illustrate crowding out in the loanable funds Market the first one is to shift the supply curve to the left the government is deficit spending and there is less supply of loanable funds for private businesses the more common way to do this is to increase the demand for loanable funds the government is demanding loans alongside businesses and that increases the demand and increases the real interest rate either one of these is acceptable on the AP macroeconomics exam I suggest you use the one that your teacher or college professor prefer either way though it's going to increase that real interest rate in the loanable funds Market decreasing gross investment a budget surplus on the other hand means that the government has to borrow less money that will decrease the interest rate increase gross investment and along with that we will have more Capital formation which increases economic growth in the loanable funds Market you can either increase the supply of loanable funds which decreases the real interest rate or you can decrease the demand for loanable funds which also decreases the real interest rate either way that's going to decrease the interest rate in the loanable funds Market increasing gross investment and with that increasing economic growth so what is that economic growth well economic growth is an increase in the potential GDP for an economy or per capita GDP it is not merely more GDP it means we have a greater ability to produce and it's usually measured through sustained increases in per capita GDP if we're going to have more economic growth within an economy it can come from two different things the first one is the quantity of resources more land more labor or more physical capital will increase economic growth the second thing that can impact economic growth is the quality of resources increases in the quality of resources will increase the productivity of those resources you may have learned about that back in microeconomics when it comes to measuring productivity we have a formula that you need to know output divided by the hours of Labor there are lots of things that can impact the productivity of an economy's workers specialization the amount of capital per worker human capital that's the skills and knowledge of those workers and Technology any of those is going to increase the amount of output per worker hour just make sure you understand that an increase in the labor force doesn't actually increase productivity because you are now dividing a greater amount of output by a greater number of worker hours so how do we show economic growth on the models that you've already learned well first of all on the Asad model we see economic growth as a rightward shift of that longrun aggregate supply curve because economic growth is not an increase in current output it's an increase in Long Run potential output and that long run accurate supply curve shows us that long run potential on the production possibilities curve that you learned a long time ago in this class we see economic growth as an outward shift of that production possibilities curve because with economic growth it is possible to produce more capital goods and consumer goods based on this graph there are some policies The Government Can enact to increase economic growth within an economy government funded research to increase technology investment tax credits to encourage Capital formation which would increase economic growth jobs trainings programs to increase human capital within an economy and supply side policies to reduce regulations on businesses and cut corporate taxes now those ones are a little bit controversial at times but you could see them on your exams the last thing we're going to talk about for this review video is a new graph that you definitely need to know for your next test it's called the Phillips curve the Phillips curve shows us the relationship between the inflation rate and the unemployment rate let me show you how it looks on the graph on the Y AIS here we have the inflation rate on the x axis we have the unemployment rate in the short run we have an inverse relationship between the inflation rate and the unemployment rate we see that Illustrated with a downward sloping short run Phillips curve at high inflation rates we have a low level of unemployment and at low inflation rates we have a high level of unemployment in the long run the relationship between the inflation rate and the unemployment rate tends to break down as a result we have a long run Phillips curve that is vertical at the natural rate of unemployment remember the natural rate of unemployment is frictional unemployment Plus structural unemployment at the intersection between those two curves we find the expected inflation rate and when the natural rate of unemployment equals the current rate of unemployment we are at long run equilibrium we find that at the intersection between the two curves when the current unemployment rate is less than the natural rate of unemployment we have an inflationary Gap the inflation rate is going to be higher than expected and the unemployment rate will be lower than the natural rate of unemployment we see that on the upper portion of the short run Philips curve when the unemployment rate is greater than the natural rate of unemployment we have a recessionary gap that is found at the lower portion of the short run Phillips curve we have a high unemployment rate and the inflation rate is lower than expected when it comes to changes within the Philips Curve Model it's best to think of the Asad model and realize that the changes we see there are going to be mirrored in the Phillips curve model what that means is right is left and left is right let me show you what I'm talking about here we have the Phillips curve and we're currently at long run equilibrium right there at point a on the Asad model it means that we are currently operating at long run equilibrium aggregate demand shifts in the Asad model cause movement along the short run aggregate supply curve here we have an right word shift of the accurate demand curve and that causes movement up to the right along the short run aurate supply curve in the Philips Curve Model that will be shown as movement up but to the left along the short run Phillips curve Illustrated as point B here we have a higher than expected inflation rate and a lower than the natural rate of unemployment current rate of unemployment if we have a leftward shift of the Agate demand curve in the Asad model that will cause movement down the short run aurate supply curve also to the left that decreases the price level and decreases real output on the Philips Curve Model that will be Illustrated as movement down to the right on the short run Phillips curve showing a lower than expected inflation rate and a higher than the natural rate of unemployment current level of unemployment shifts of the short run a supply curve in the Asad model will be shown as mirrored shifts of the short short run Phillips curve as well here we have a rightward shift of that short run IR supply curve that will be Illustrated as a leftward shift of the short run Phillips curve likewise a leftward shift of the short-run aggate supply curve will be shown on the Philips Curve Model as a rightward shift of the short-run Phillips curve so the key to figuring this out is thinking of the short run Phillips curve as a mirror of the short-run aggate supply curve and then it's a lot less tricky so what causes the long run Phillips curve to shift well it can move and because it is a line with the natural rate of unemployment it will shift when there are changes in the natural rate of unemployment that means it will shift when there's a change in the structural unemployment rate or frictional unemployment rate if there's an increase in either one of those we're going to see a rightward shift of the long run Phillips curve and when there's a decrease in either one of those we're going to see a leftward shift of that long run Phillips curve we got through it that was a lot of information there and if you knew it all you are on your way to acing your next exam if you need a little more help head down to the links below where there are lots of games and activities from reviewe eon.com to help you study and practice the skills you need for that next exam if you want to support this channel make sure you like And subscribe and then head over to reviewe eon.com and pick up the total review booklet with everything you need to know to pass your final exam or AP economics exam thank you very much I'll see you guys next time