AP EXAM: Unit 5 Flashcards
Are monetary/fiscal policy demand-side or supply side?
Demand side- shifts AD
What constrains an economy in the long run?
Available factors of production
What are demand side policies effective and ineffective at?
Effective at closing output gaps, but not at achieving long run economic growth
How does the LRAS shift?
Changes in an economy’s long run output are made possible through the factors that create economic growth
What does the SRPC illustrate?
Trade off between unemployment and inflation in the short run
Where is the LRPC vertical?
At the NRU
When does the NRU shift?
Changes made to structural/frictional unemployment
What’s the result of AD shifting faster than SRAS?
Increase in inflation over time
How is economic growth facilitated?
Increases in the quantity or quality of factors of production (land, labor, capital)
Why can monetary growth never equal economic growth?
Supplying more money to an economy facilitates more transactions, but doesn’t CREATE transactions
What does the growth rate of the money supply determine, according to the quantity theory of money?
The growth rate of the price level
Monetary equation of exchange
MV = PQ
How are bond markets affected by deficit spending?
More bonds must be issued to investors who lent money
What are the economic consequences of crowding out?
The expansionary effect of a fiscal stimulus will be smaller than expected, long run economic growth is hurt (less capital accumulation)
Define economic growth.
An increase in an economy’s actual and potential output over time.
GDP growth rate
GDP in year 2 - GDP in year 1 / GDP in year 1 x 100
Consequences of economic growth
- More jobs
- Higher living standards
- Higher income
What is the economic theory of aggregate production function?
A country’s rate of economic growth is a function of the allocation of the factors of production, including labor, capital, land, and technology
Define productivity in an economy.
The amount of output attributable to a single unit of input
Difference between forms of economic growth
Economic growth (increases in labor) and economic growth (increase in quality of human capital) will both lead to total output increase, but the latter will be the only one to lead to higher per capita GDP
What models show long run economic growth?
- PPC
- Business cycle
- AD/AS
Goals of supply side policies
Increasing productivity, labor force participation, infrastructure or tech in an economy, and increasing AS
What supply side policies achieve
Increased productivity, reduced production costs (shifts SRAS and LRAS)
Ways supply side policies impact aggregate supply positively
- Reduced costs of doing business
- More household incentive to work
Supply side labor market reforms
- Reducing/eliminating the minimum wage
- Weakening labor union power
- Reducing gov’t spending
Benefits of trade liberalization
Provide a country’s producers access to imported raw material and other factors of production
Government investments in the economy
- Public resources
- Public education
- Increased tax revenue
