Long-Run Consequences of Stabilization Policies
Jackson Hernandez
8 min read
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Study Guide Overview
This study guide covers the long-run consequences of fiscal and monetary policies. Key topics include: the effects of fiscal and monetary policies on long-run equilibrium, the Phillips Curve (relationship between inflation and unemployment), the Quantity Theory of Money (money supply, velocity, price level, and output), national debt and deficits, crowding out, and factors influencing economic growth. It also provides practice questions and exam tips.
#AP Macroeconomics: Unit 5 - Long-Run Consequences of Stabilization Policies 🚀
Hey there, future AP Macro superstar! This unit is all about the long-term effects of fiscal and monetary policy, and how they shape our economy. Think of it as the 'big picture' unit, where we zoom out and see how everything connects. Let's get started!
#5.1 Fiscal and Monetary Policy: The Big Picture
Remember that handy chart? It's your guide to understanding how fiscal and monetary policies impact the long-run equilibrium. Think of it like a fixer-upper for the economy 🛠️. We're looking at what happens when we have a recessionary or inflationary gap and how the economy gets back to its potential.
- Fiscal Policy: Government spending and taxation. Think of it as the government's way of directly influencing the economy.
- Expansionary Fiscal Policy: Increased government spending or tax cuts to stimulate growth.
- Contractionary Fiscal Policy: Decreased government spending or tax increases to slow down growth.
- Monetary Policy: Actions by the central bank (like the Federal Reserve) to control the money supply and interest rates.
- Expansionary Monetary Policy: Lowering interest rates or increasing the money supply to stimulate growth.
- Contractionary Monetary Policy: Raising interest rates or decreasing the money supply to slow down growth.
Focus on how these policies shift the Aggregate Demand (AD) curve in the short run and how the economy adjusts back to the Long-Run Aggregate Supply (LRAS) curve in the long run. Use AD/AS graphs to visualize the effects!
#5.2 The Phillips Curve: Inflation vs. Unemployment
The Phillips Curve shows the relationship between inflation and unemployment. It's a trade-off in the short run, but not in the long run!
- Short-Run Phillips Curve (SRPC): Downward sloping, showing the inverse relationship between inflation and unemployment. Lower unemployment often means higher inflation, and vice versa.
- **Long-Run Phillips...
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