Unit 5: Top 10 Theories, Policies, & Growth Concepts to Know (Macro)
Unit 5: Top 10 things you need to know about classical theory, Keynesian theory, monetarism, crowding out effect, short-run and long-run Phillips curves, loanable funds market, and economic growth. This is geared toward college-level principles of macro courses and students enrolled in AP Economics. Top 10 concepts discussed in this video: #1. Classical vs. Keynesian Economics, #2. Criticisms of Fiscal & Monetary Policy, #3. Long-Run Economic Growth, #4. Real Interest Rates & Growth, #5. Loanable Funds Crowding Out Effect, #6. Loanable Funds Savings, #7. Phillips Curve Aggregate Demand, #8. Phillips Curve Aggregate Supply, #9. Phillips Curve Inflation Expectations, and #10. Phillips Curve in the Long Run.
Unit 5 Monetary & Fiscal Combinations
Crowding out is the effect of a rise in interest rates caused by increased borrowing by the federal government. Higher interest rates "crowd out" consumer (C) and business borrowing (Ig). Interactions between monetary policy and fiscal policy can affect overall AD - an expansionary fiscal policy with a tight monetary policy can cause "crowding out."
The Phillips Curve illustrates the inflation unemployment tradeoff and how this tradeoff differs in the short-run and long-run.
Economic growth is measured by changed in real GDP and/or by changes in real GDP per capita.
Economic growth is concerned with increasing an economy's total productive capacity at full employment. This output is represented by a vertical long-run AS curve so economic growth can be shown as a rightward shift of a nation's LRAS curve or rightward shift of its PPC.
Keynesian model is based on the belief that fiscal policy works through AD in the short run. Monetary policy works through interest rates and investment which also affects AD.
Classical model represents an idealized version of a private-enterprise economy where AD/AS together determine the price level.
Monetarists focus on changes in the money supply; remember MV=PQ.
Supply-Side economics emphasizes factors that cause the AS curve to shift. Inflation and stagflation are caused by decreases in AS not AD. They recommend microeconomic solutions like less government intervention and improved productivity.
Unit 5 Student Wiki
Loanable Funds Market: Shows relationship between real interest rates and the quantity of loanable funds. If the government borrows money, the demand shifts right (or private supply shifts left). (Bianca L.)
Crowding Out Effect: In a recession, the government may increase spending to raise the aggregate demand, but the government borrows money, raising real interest rates. This then reduces the prices sector spending, which can be detrimental to long term growth. (Bianca L.)
Phillips Curve: Shows inverse relationship between inflation and unemployment in the short run. The long run phillips curve is vertical at the natural rate of unemployment. (Bianca L.)
Monetary Rule: The Monetarist rule that the Fed should only increase the money supply by the amount that the economy is expected to grow at. For example, if the economy is growing at a rate of 3%, increase the money supply by 3% (Richard G.)
Rational Expectation Theory: The theory that people plan ahead for the effects of fiscal and monetary policies, and thus counteract the intended effects of the policy. As a result, real output does not change. (Bianca L.)
Supply-Side Economics: The policy in which the government lowers income tax and capital gains tax in order to reduce regulation and allow for the aggregate supply curve to shift right (Dan M.).
Economic Growth: an increase in real GDP per capita over time; growth lessens the burden of scarcity; main sources of growth include increases in resources and increases in productivity (health, training, education, motivation improvements); shown graphically by a rightward shift of the PPC curve or a rightward shift of the long-run aggregate supply curve. (Jen S.)
Capital Stock: All the capital goods in an economy such as machinery, tools, etc. These are business investments. When interest rates are high, capital goods are less likely to be replaced and therefore capital stock can shrink. This would be detrimental to economic growth. (Bianca L.)
Growth and Long Run Aggregate Supply: The Long Run Aggregate Supply curve is a perfectly vertical line. In the long run, capital, technology, and labor will affect the AS because at this point it is assumed that everything in the economy is being used optimally. (Ali P.)
Growth and the Production Possibilities Curve: The PPC is an excellent way to show economic growth. If you are operating on the curve, you are operating at full efficiency with minimal unemployment. To the left of the curve shows signs of recession, and to the right of the curve shows signs of the future. One way for the curve to shift rightwards is to have a sudden boom in technology (Ray I)
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