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United StatesEconomics

Unit 5: Long-Run Consequences of Stabilization Policies

7 dot points across 7 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

How does government borrowing reduce private investment?

Topic 5.5 Crowding Out: explain how government deficit borrowing raises the real interest rate and reduces private investment, using the loanable funds market.
A focused answer to AP Macroeconomics Topic 5.5, covering the crowding-out effect, how government deficit borrowing raises the real interest rate and reduces private investment in the loanable funds market, the long-run growth consequences, and the contrast with monetary policy, with a worked graphing question.
11 min answer →

What drives long-run economic growth, and how is it shown in the models?

Topic 5.6 Economic Growth: define economic growth, identify its determinants, and show it as an outward shift of the production possibilities curve and the long-run aggregate supply curve.
A focused answer to AP Macroeconomics Topic 5.6, covering the definition of economic growth, the role of productivity and the determinants (physical capital, human capital, technology, and resources), and how growth appears as an outward shift of the PPC and LRAS, with a worked question.
11 min answer →

How do fiscal and monetary policy work together in the short run to close output gaps?

Topic 5.1 Fiscal and Monetary Policy Actions in the Short Run: combine fiscal and monetary policy to close output gaps, and trace their joint effects on output, the price level, and interest rates.
A focused answer to AP Macroeconomics Topic 5.1, covering how fiscal and monetary policy are combined to close recessionary and inflationary gaps, the difference between the two, and their joint effects on output, the price level, and interest rates, with a worked policy question.
11 min answer →

What is the difference between a deficit and the debt, and what are the long-run consequences of borrowing?

Topic 5.4 Government Deficits and the National Debt: distinguish a budget deficit from the national debt, and explain the long-run consequences of persistent deficits.
A focused answer to AP Macroeconomics Topic 5.4, covering the difference between a budget deficit (a flow) and the national debt (a stock), how deficits accumulate into debt, the role of automatic stabilizers, and the long-run consequences including higher interest rates and crowding out, with a worked question.
11 min answer →

Why does sustained money growth cause inflation but not long-run real growth?

Topic 5.3 Money Growth and Inflation: apply the quantity theory of money and the equation of exchange to explain why sustained money growth raises the price level in the long run.
A focused answer to AP Macroeconomics Topic 5.3, covering the quantity theory of money, the equation of exchange, the long-run neutrality of money, and why sustained money growth causes inflation rather than real growth, with full worked calculations.
11 min answer →

Which public policies raise an economy's long-run growth?

Topic 5.7 Public Policy and Economic Growth: evaluate how supply-side and growth-oriented public policies, such as investment in capital, education, infrastructure, and research, raise long-run potential output.
A focused answer to AP Macroeconomics Topic 5.7, covering the public policies that raise long-run growth, including investment incentives, education and human capital, infrastructure, research and development, and supply-side tax policy, and how each shifts LRAS, with a worked question.
11 min answer →

What is the short-run trade-off between unemployment and inflation, and why does it vanish in the long run?

Topic 5.2 The Phillips Curve: explain the short-run trade-off between inflation and unemployment, the vertical long-run Phillips curve at the natural rate, and how the curves shift.
A focused answer to AP Macroeconomics Topic 5.2, covering the short-run Phillips curve and its trade-off, the vertical long-run Phillips curve at the natural rate of unemployment, the link to the AD-AS model, and how supply shocks and expectations shift the curve, with a worked graphing question.
12 min answer →