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agendaAnything new?Chapter 35…a quick reviewHomework
Chapter 35Questions 1, 2, 3Problem 1
Intro to Chapter 36Homework
Read Chapter 36Question 6 and Problems 1, 2
Read Handout, Current Reading onlineQuiz Next Class…Ch. 35 & 36
Anything New?
Chapter 35…A Quick Review
Chapter 35…A Quick Review
Chapter 35…A Quick Review
Laffer Curve
Graph relating tax rates and tax revenue
Higher rates may not mean higher revenue. But then it again it might.
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
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)
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)
Homework
Chapter 35 Questions 1, 2, 3 Problem 1
Three Minute Break
Chapter 36
Three Basic Theories1. Classical (or Neo Classical or
NeoCon)2. Keynesian3. Monetarists
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
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
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
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 = PricesQ = Quantity of Goods and Services
Chapter 36
Equation of Exchange MV = PQ
P x Q sounds like….
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
Chapter 36
Equation of Exchange MV = PQ ≈ GDP
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).
But V can also stand for Volatile.
Chapter 36
What would cause V to increase from 1990 to 2000?
Chapter 17
Chapter 36
Equation of Exchange MV = PQ
With V moving around, the ability to control GDP (P x Q) with just M is difficult.
The AS / AD model
Keynesian Range
Classical Range
IntermediateRange
HOMEWORK
Read Chapter 36 Question 6 and Problems 1, 2
Read Handout, Current Reading online
Quiz Next Class…Ch. 35 & 36