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

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 Theories
1.
Classical (or Neo Classical or NeoCon)
2.
Keynesian
3.
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 = Prices
Q = 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).
Chapter 36
But V can also stand for Volatile.
Chapter 17
What would cause V to increase from
1990 to 2000?
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
Classical
Range
Keynesian Range
Intermediate
Range
HOMEWORK

Read Chapter 36



Question 6 and Problems 1, 2
Read Handout, Current Reading online
Quiz Next Class…Ch. 35 & 36