1. and other stuff

2. Manipulating the PC Movement along the SRPC caused by change in AD Contractionary fiscal or monetary policy will reduce inflation but increase u%; MOVE DOWN/RIGHT ALONG THE SRPC Expansionary policy will increase inflation but decrease u%; Move UP/LEFT ALONG THE SRPC

3. Shifting the PCs To shift the SRPC, there will be a change in inflationary expectations. If people expect more inflation, they will begin spending money before it loses value (SRPC shifts right) If their inflationary expectations are reduced, they will spend less/more slowly so money can gain interest (SRPC shifts left) SRPC will shift left with positive supply-side economics news; will shift right with negative supply- side economics news

4. According to the short-run Phillips Curve, there is a trade-off between a. interest rates and inflation b. the growth of the money supply and interest rates c. unemployment and economic growth d. inflation and unemployment e. economic growth and interest rates

5. According to the long-run Phillips Curve, which of the following is true? A. Unemployment increases with an increase in inflation B. Unemployment decreases with an increase in inflation C. Increased automation will lead to lower levels of structural unemployment in the long run D. The natural rate of unemployment is independent of monetary and fiscal policy changes that affect aggregate demand

6. An increase in which of the following will lead to lower inflation and lower unemployment? A. Exports B. Aggregate demand C. Labor productivity D. Government spending E. The international value of domestic currency

7. Which of the following best explains how an economy could simultaneously experience high inflation and high unemployment? a. the government increases spending without increasing taxes b. the government increases taxes without increasing spending c. inflationary expectations continue d. teenagers stay out of the labor force e. negative supply shocks cause factor prices to increase.

8. Practice FRQ (from 2009 exam) Assume that the US economy is in long-run equilibrium with an expected inflation rate of 6% and an unemployment rate of 5%. The nominal interest rate is 8%. A) Using a correctly labeled graph with both the short- run and long-run Phillips curves and the relevant numbers from above, show the current long-run equilibrium as Point A. B) Calculate the real interest rate in the long-run equilibrium.

9. C) Assume that the Federal Reserve decides to target an inflation rate of 3%. What open-market operation should the Federal Reserve undertake? D)Using a correctly labeled graph of the money market, show how the Federal Reserve’s action you identified in part (C) will affect the nominal interest rate. E) How will the interest rate change you identified in part (D) affect aggregate demand in the short run? Explain.

10. F) Assume that the Federal Reserve action is successful. What will happen to each of the following as the economy approaches a new long-run equilibrium? (i) the short-run Phillips curve. Explain (ii) the natural rate of unemployment

11. The Laffer Curve Definition : Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. In a nutshell: At 0% tax rate, revenue is $0; at 100% taxation, revenue is $0. Tax rates that are too high are a disincentive to work more. At a certain point of taxation, revenues actually fall because people will work less. There is little disagreement on whether or not the principle is true; arguments arise over the tax rates.

13. The name? Arthur Laffer Was in a meeting with Rumsfeld, Cheney, and others in 1974, arguing against tax increases by Pres. Ford He drew it on a cocktail napkin to illustrate it Laffer curve is a theoreti cal represen tation of the relations hip between governm ent revenue raised by taxati on and all possible rates of taxation.taxati on

14. Key idea The Laffer Curve supports supply-side economics, which asserts that overall economic well-being is increased when barriers to production are removed. These economists believe in low tax rates and capital gains taxes as a way to encourage productivity A favorite theory of Pres. Reagan

15. Hallelujah. Pass the Tylenol. We’re done. Sort of. If you are going to take the AP Exam, you need to make every effort to be here on Friday AND the Macro Cram Session the night before the exam. Wed, 5/11, 6:30-8:30 Start studying your cards about 20 minutes each night.

16. Test : Money, Banking, the Fed, Stabilization Functions and characteristics of money M1, M2, M3 Multiple expansion of deposits ; calculate money multiplier, excess reserves, change in loans (aka change in money supply through loans), change in money supply Equation of exchange The Fed, purpose and structure Tools of monetary policy Real v. nominal interest

17. Graphs AD/AS, LRAS Loanable funds (supply/demand!) Money market ( supply/demand with vertical money supply curve) Phillips curve, SRPC, LRPC Laffer curve

18. The test 20 carefully chosen MC questions 1 bohemoth FRQ

19. Prepare yourself by Studying class notes Reviewing flashcards Study and practice drawing, labeling, and shifting the graphs BRING YOUR NOTES TO CLASS.