Macro AP Unit 5 Flashcards
Explain how monetary policy can be used to fight inflation caused by expansionary fiscal policy.
The central bank can decrease the money supply to increase interest rates and decrease investment and interest-sensitive consumer spending to prevent high inflation caused by expansionary fiscal policy.
Explain how to show a recessionary gap, inflationary gap, and full employment on the Phillips curve.
A recessionary gap is a point down and to the right on the SRPC, an inflationary gap is up and to the left on the SRPC, and full employment is in the middle where the SRPC and LRPC intersect.
Explain why the long-run Phillips curve is vertical.
There is no tradeoff between inflation and unemployment in the long-run. In the long-run, the economy will always be at the natural rate of unemployment (NRU).
Explain how to show a negative supply shock usingthe Phillips curve.
A negative supply shock results in a rightward shift in the SRPC showing an increase in both inflation and unemployment.
Explain why an increase in the money supply will increase nominal GDP, but not real GDP.
The quantity theory of money states that an increase in the money supply doesn’t increase the amount of goods/services that can be made. Without more investment, more money only causes more inflation.
Explain the difference between a budget deficit and the national debt.
A budget deficit is an annual measure showing how much spending outpaced tax revenue in a year. The national debt is the cumulation of all budget deficits over time.
Explain why deficit spending can result in crowding out.
When the government borrows it decreases the supply of loanable funds available for private investment. This increases the real interest rate and decreases the number of loans taken by businesses.
Explain why crowding out results in less economic growth in the long-run.
Crowding out causes higher interest rates which decreases investment. Less investment results in less capital stocks and less growth overtime.
Explain how to show economic growth using the aggregate demand and supply model.
Economic growth is shown by a rightward shift in the LRAS. This means that more output can sustainably be produced than before.
Explain why an increase in physical capital or human capital can result in economic growth.
More physical capital means that businesses can permanently produce more output than before. More human capital makes workers more productive since they are smarter and more educated.
Explain how government spending can result in economic growth
Government spending on infrastructure results in more growth since it increases productivity by improving transportation and production. Government spending on education can increase human capital making workers better.
