Economic Stability Chapter 16

I. Macroeconomic Equilibrium A.Aggregate Supply 1.Total value of goods and services produced at every price level (real GDP) 2.AS curve Slopes ______________ (law of supply) Horizontal region – use of previously unproductive resources Vertical region – __________________ Increase in AS (shift right) – __________________ Decrease in AS (shift left) – __________________ B.Aggregate Demand C.Macroeconomic equilibrium

Aggregate Supply Curve Price Level Real GDP

I. Macroeconomic Equilibrium B.Aggregate Demand 1.Total value of goods and services demanded _______________________________________ 2.AD curve Slopes downward because money supply is ________ Increase (shift right) – _________________ Decrease (shift left) – _________________

Aggregate Demand Curve Price Level Real GDP

I. Macroeconomic Equilibrium C.Macroeconomic equilibrium 1.___________at a particular price level as determined by AS and AD 2.Shown graphically by the ______________ of AS curve and AD curve

Macroeconomic Equilibrium Price Level Real GDP

II. Demand-Side Policy Definition – ____________________________________________ ____________________________________ A.Keynesian Framework 1.Ideas from _____________________________ 2.Recession (decrease in GDP) is caused by ______________________________________________ ______________________________________________ 3.Effects of decrease would then destabilize the other sectors (downward spiral) B.The role of Government 1.___________________ to offset decrease in investment 2.____________________to allow for increased public and business sector spending 3.____________________ would be made up when recession was over

II. Demand-Side Policy C.Automatic Stabilizers – _______________________________________________ _______________________________________________ ___________________________________ 1.___________________________________________ 2.___________________________________________ 3.___________________________________________________ _________________________________________ D.Effect on macroeconomic equilibrium 1.Demand-side policies will cause ___________________ 2.As long as there are unused resources GDP will increase E.Limits 1.Hard to make government spending increases temporary – deficits don’t go away 2.Too much demand side policy will cause ___________________________________________________ ___________________________________________________

Demand Side Policy Price Level Real GDP AS AD 1 AD 2 AD 3

III. Supply-Side Policy Definition – _______________________________________________________________ _________________________________________________________ Associated with _________________________as these policies were tried after the stagflation of the 1970s A.The Role of Government 1.Reduced government spending = _____________________________ 2.Reduced regulations = _____________________________________ 3.Permanent low taxes ________________________________________________ Lower rates might actually increase tax revenue (____________________) B.Affect of macroeconomic equilibrium 1.Supply side polices will cause __________________________ 2.GDP will increase ___________________________________________________________ ___________________________________________________________ C.Limitations 1.Difficult to predict if any particular supply side policy will work 2.SS policies tend to encourage _________, but not necessarily _________

Aggregate Supply Curve Price Level Real GDP AD AS 2 AS 1

IV. Monetary Policy Monetarism – ________________________________________ __________________________________ A.Inflation 1.Easy policies can increase GDP but risk inflation 2.Monetarist believe the money supply should be grown to match GDP growth B.Unemployment – monetary policy is not effective for ___________________________