- inflationary gap- actual > potential
- recessionary gap- actual < potential
Phillips Curve
- Inverse relationship between inflation and unemployment
- ***Long run Phillips curve shows that there is NO TRADE OFF between inflation and unemployment in the long run after expectations of inflation have had time to adjust
Productive efficiency- producing most amount of goods with least amount of resources
Allocative efficiency- efficiently using factors of production to produce desirable goods
Loanable Funds Model
- Factors that affect demand of credit
- rising interest rates (-)
- budget deficits (+)
- inflationary expectations (-/+)
- Factors that affect supply
- rising interest rates (+)
- savings (+)
- inflationary expectations (+)
- DON'T FORGET CROWDING OUT- when government spending increases, the demand for credit increases which increases real interest rates. This leads to less investment spending which leads to less economic growth in the long run. REMEMBER increased investment spending will shift LRAS to the right and the PPC outward!!!
Economic Theories
- Keynes- manipulate economy by shifting AD, wages sticky in short term
- Classical- economy self corrects
- Rational Expectations- there's no need to do anything because economy would adjust instantaneously. If people think that inflation is higher, then they adjust their spending.
- Monetarism- economy is stable unless there's inappropriate monetary policy
No comments:
Post a Comment