1. agenda Anything new? Chapter 35…a quick review Homework Chapter 35 Questions 1, 2, 3 Problem 1 Intro to Chapter 36 Homework Read Chapter 36 Question 6 and Problems 1, 2 Read Handout, Current Reading online Quiz Next Class…Ch. 35 & 36

2. Anything New?

3. Chapter 35…A Quick Review

5. Laffer Curve Graph relating tax rates and tax revenue Higher rates may not mean higher revenue. But then it again it might.

6. Chapter 35…A Quick Review Stagflation A period of stagnant economic growth and inflation. What are the numbers? < 2% GDP growth > 4% inflation Not precise

7. Chapter 35…A Quick Review Stagflation Occurs when AD shifts right while in the inflationary part of the AS curve or A supply shock suddenly shifts the supply curve to the left (a sudden decrease in supply)

8. Chapter 35…A Quick Review Disinflation (Deflation) Falling prices (deflation) cause businesses to do what? Lower revenue means fewer dollars for wages or even create a need to fire workers Falling prices (deflation) cause consumers to do what? Save more, borrow less, repay loans (reduce money supply…a contractionary action)

9. Homework Chapter 35 Questions 1, 2, 3 Problem 1

10. Three Minute Break

11. Chapter 36 Three Basic Theories 1. Classical (or Neo Classical or NeoCon) 2. Keynesian 3. Monetarists

12. Chapter 36 Classical Economic Theory Adam Smith, FA Hayek Laissez-Faire, Free Market approach (i.e. minimal government involvement) AS Curve vertical Popular up to the 1930s The Great Depression was the downfall

13. Chapter 36 Keynesian Economic Theory John Maynard Keynes Increased government involvement in the form of fiscal policy (taxes and spending) AS Curve horizontal Popular up to the late 1970s The Great Stagflation of the 70s (not disco) was the downfall

14. Chapter 36 Monetarist Economic Theory No one person but Martin Feldstein and Paul Volker are associated with it. Focus on money supply as a way of increasing GDP. Equation of Exchange (MV = PQ) Popular through the eighties Wild swings of interest rate was the criticism

15. Chapter 36 Equation of Exchange MV = PQ M = Money Supply (usually M1) V = Velocity (the number of times a dollar circulates through the economy) P = Prices Q = Quantity of Goods and Services

16. Chapter 36 Equation of Exchange MV = PQ P x Q sounds like….

17. Chapter 36 Equation of Exchange MV = PQ P x Q sounds like….Nominal GDP Dollar value of all goods and services produced in the country

18. Chapter 36 Equation of Exchange MV = PQ ≈ GDP

19. Chapter 36 Equation of Exchange MV = PQ ≈ GDP So if we increase M, then GDP increases. Unless Q stays the same then we get P^ (inflation).

20. But V can also stand for Volatile. Chapter 36

21. What would cause V to increase from 1990 to 2000? Chapter 17

22. Chapter 36 Equation of Exchange MV = PQ With V moving around, the ability to control GDP (P x Q) with just M is difficult.

23. The AS / AD model Keynesian Range Classical Range Intermediate Range

24. HOMEWORK Read Chapter 36 Question 6 and Problems 1, 2 Read Handout, Current Reading online Quiz Next Class…Ch. 35 & 36