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