1. Section 6

2. Monetary Policy

3. Key Terms Cyclically Adjusted Budget Balance
Classical Model of the price level
Quantity Theory of Money
Short-Run Phillips Curve
Velocity of Money
Government Debt
Nonaccelerating Inflation Rate of Unemployment
Natural Rate Hypothesis
Fiscal Year
Political Business Cycle
Public Debt
New Keynesian Macroeconomics
Debt-GDP Ratio
Long-Run Phillips Curve
Debt Deflation
Implicit Liabilities
Rational Expectations
Target Federal Funds Rate
Zero Bound
New Keynesian Economics
Liquidity Trap
Expansionary Monetary Policy
Keynesian Economics
Real Business Cycle Theory
Macroeconomic Policy Activism
Contractionary Monetary Policy
Cost-Push Inflation
Monetarism
Demand-Pull Inflation
Taylor Rule
Discretionary Monetary Policy
Inflation Targeting
Monetary Neutrality
Monetary Policy Rule

4. Key Formulas
Velocity of Money M*V = P*Y Money supply*Velocity of Money = Nominal GDP

5. Monetary Policy

6. Key Graphs

7. Increase in Money Supply

8. Decrease in Money Supply

9. Classical Model
Vertical Supply Curve – even in the short run.

10. Short-Run Phillips Curve

11. Long-Run Phillips Curve

12. Demand Pull Inflation

13. Cost Push Inflation

14. Supply Side Economics

15. Economic Schools of Thought
Classical macroeconomics
Keynesian macroeconomics
Monetarism
Modern consensus
Is expansionary monetary policy helpful in fighting recessions? No
Not very
Yes
Yes, except in special circumstances
Is expansionary fiscal policy effective in fighting recessions?
Can monetary and/or fiscal policy reduce unemployment in the long run?
Should fiscal policy be used in a discretionary way?
No, except in special circumstances
Should monetary policy be used in a discretionary way?
Still in dispute

16. AP Exam Tips
Budget balance is the difference between gov’t tax revenue and gov’t spending (including transfers) in a given year.
A budget deficit occurs when the gov’t revenue is less than its spending in a given year.
The budget deficit almost always rises when the unemployment rises and falls when the unemployment falls.
Don’t confuse the federal funds rate with the discount rate. The Fed can only target the federal funds rate because it is set through the interaction of supply and demand.
AD curve shifts same way as the MS : Increase in MS = increase in AD. Decrease in MS = decrease in AD.
Be specific on the exam. If asked what policy the central bank should use to correct a particular problem, “expansionary” or “contractionary” monetary policy isn’t good enough. You must identify one of the three tools – OMO, DR, or RR – and usually the best answer is an OMO – buy or sell gov’t bonds.
Classical economists believe that prices and wages are flexible and adjust quickly – this means a vertical AS curve even in the Short Run.
The Keynesian model believes prices and wages are sticky, leading to an upward sloping SRAS curve.
Be able to graph and explain both cost push and demand pull inflation.