No Bull Economics Lessons

Macroeconomics & Microeconomics Concepts You Must Know

Essential Questions

How do inflation expectations affect the Phillips curve?

Posted on April 17, 2014 at 12:15 AM Comments comments (0)

Inflation expectations are a determinant of the short-run aggregate supply curve. When the short-run aggregate supply curve shifts one direction, the short-run Phillips curve shifts the opposite direction.


If inflation expectations rise, SRAS shifts leftward raising the price level and unemployment (stagflation). To illustrate an increase in inflation and unemployment with a Phillips curve, shift the short-run Phillips curve to the right (see the No Bull Review diagram below).



If inflation expectations fall, SRAS shifts rightward lowering the price level and unemployment. To illustrate a decrease in inflation and unemployment with a Phillips curve, shift the short-run Phillips curve to the left.


Inflation expectations do not affect the vertical long-run Phillips curve.


AP Macroeconomics Unit 5 Macroeconomic Theory

How does savings affect the loanable funds market?

Posted on April 16, 2014 at 11:40 AM Comments comments (0)

The loanable funds market shows the relationship between the real interest rate and quantity of loanable funds.


More savings: If there is an increase in savings by the private sector, the supply of loanable funds increases (shifts right) causing the real interest rate to fall. When the real interest rate decreases, investment spending increases. This is good for the growth of capital stock and long run economic growth.


Low real interest rates also depreciate the value of currency as foreigners are not attracted to the lower returns on bonds. When the currency depreciates, net exports increase as the goods look cheaper to foreigners.


Less savings: If there is a decrease in savings by the private sector, the supply of loanable funds decreases (shifts left) causing the real interest rate to rise. When the real interest rate increases, investment spending decreases. This is bad for the growth of capital stock and slows down the rate of long run economic growth.


High real interest rates also appreciate the value of currency as foreigners are more attracted to the higher returns on bonds. When the currency appreciates, net exports decrease as the goods look more expensive to foreigners.


AP Macroeconomics Unit 5 Macroeconomic Theory

How do you graph long run economic growth?

Posted on April 14, 2014 at 7:40 PM Comments comments (0)

Economic growth is an increase in real GDP or real GDP per capita over time. You can illustrate long run economic growth in two ways:


1) Rightward shift of the long run aggregate supply curve

2) Outward shift of a nation's production possibilities curve.


AP Macroeconomics Unit 5 Macroeconomic Theory

How does the crowding out effect work?

Posted on April 14, 2014 at 6:10 PM Comments comments (0)

The crowding out effect is an unintended consequence of expansionary fiscal policy. When the government increases spending, it borrows from the loanable funds market causing real interest rates to rise. The increase in interest rates causes households and businesses to cut back on spending. This means that consumption and gross investment is "crowded out" by the expansionary fiscal policy that caused real interest rates to rise.


The heavy metal music video below explains everything that you need to know about the crowding out effect in the short run and the long run.

You need Adobe Flash Player to view this content.

AP Macroeconomics Unit 5 Macroeconomic Theory

What is the Phillips curve?

Posted on April 14, 2014 at 5:40 PM Comments comments (0)

The short-run Phillips curve is a downward sloping curve that shows the inverse relationship between inflation and unemployment. Inflation is on the Y-axis and unemployment is on the X-axis. When aggregate demand shifts to the right, inflation increases and unemployment falls. This means that the economy moves point-to-point leftward along the short-run Phillips curve.


In the long run, there is no tradeoff between inflation and unemployment. The long-run Phillips curve is vertical at the natural rate of unemployment (or the NAIRU).


AP Macroeconomics Unit 5 Macroeconomic Theory


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