AP Economics – 2/21/19

I.   Bellwork

The economy of Dodgelandia is experiencing an inflationary gap.
a. How could the Central Bank use monetary policy (3 specific examples) to return the economy to full employment?
b. Use a correctly labeled graph of the money market to show how this monetary policy would impact the equilibrium interest rate.
c. Describe how the monetary policy in part (a) would affect the AD/AS graph, the aggregate price level and real GDP in Dodgelandia.

II.  Objectives:

• Use the classical model of the price level
• Explain why efforts to collect an inflation tax by printing money can lead to high rates of inflation and even hyperinflation
• Define the types of inflation cost-push, demand-pull, wage-price spiral
• Construct, analyze and interpret graphs demonstrating expansionary and contractionary monetary policy and the short and long rum impact on Prices, Inflation, and GDP

III.  Discussion:  P318-325.

A.  Money and Inflation

1. The Classical Model of Money and Prices
2. The Inflation Tax
3. The Logic of Hyperinflation

B.  Moderate Inflation and Disinflation

    1.  Cost Push & Demand Pull

• Inflation- Cost-push & Demand-pull- Macro 3.6

     2. The Output Gap and the Unemployment Rate

•     Actual real GDP – potential real GDP = Output Gap
•      Negative = unemployment is above the natural rate
•       Positive = unemployment is below the natural rate
•       Zero = unemployment is equal to the natural rate

IV.  Videos:

• Why Are People In Venezuela Starving (Hyperinflation Explained)?
• Hyperinflation Explained in One Minute
• Macro 3.3- Long Run Aggregate Supply, Recession, and Inflation (LRAS)

V.  Classwork on iLearn

• 33.1 WS Inflation Tax
• 4.6 Monetary Policy in Action

AP Economics