A one-page visual summary of Long-Run Consequences of Stabilization Policies — every key topic, term, and theme you need to know for the exam, on a single screen.
What it covers: The long-run effects of money growth, the Phillips curve trade-off, government deficits/debt, and economic growth.
Exam weight: About 20–30% of the AP Macroeconomics exam — tied with Unit 3 for the most heavily weighted unit.
The big question: What happens to inflation, unemployment, and growth once the economy has time to fully adjust — and what are the long-run costs of policy choices made today?
Big Ideas covered: Money Growth & Inflation, Expectations, and Long-Run Fiscal Consequences.
Key topics at a glance
Money Growth & Inflation
Quantity theory: M × V = P × Y. In the long run, excess money growth becomes inflation, not higher real output.
Short-Run Phillips Curve
Downward-sloping: lower unemployment ↔ higher inflation in the short run. Shifts with expected inflation and supply shocks.
Long-Run Phillips Curve
Vertical at the natural rate of unemployment. No permanent trade-off once expectations fully adjust.
Money Growth Rule
Monetarist proposal: grow the money supply at a steady, predictable rate rather than actively adjusting it, to avoid policy-driven instability.
Deficits vs. Debt
Deficit = annual flow.Debt = accumulated stock of all past deficits (minus surpluses).
Crowding Out (Long Run)
Sustained deficits → more government borrowing → higher real interest rates → less private investment → slower capital growth.
Economic Growth
Driven by human capital, physical capital, technology, and resources. Public policy can boost growth through education, R&D, and stable institutions.
The key terms you must know
Quantity theory of money — M × V = P × Y; the foundation for the long-run money-inflation link.
Short-run vs. long-run Phillips curve — downward-sloping trade-off vs. vertical at the natural rate.
Natural rate of unemployment (NAIRU) — the unemployment rate consistent with stable inflation.
Stagflation — simultaneous high inflation and high unemployment, often from a negative supply shock.
Money growth rule — the monetarist proposal for steady, rule-based money supply growth.
Budget deficit vs. national debt — annual flow vs. accumulated stock.
Crowding out — reduced private investment from government borrowing raising real interest rates.
Human capital — workforce skills and education that boost productivity and long-run growth.
Key themes to remember
The long run erases short-run trade-offs. The Phillips curve trade-off and the output gains from money growth are both temporary, not permanent.
Expectations are the mechanism that closes the gap. Once people anticipate inflation correctly, the short-run advantages of surprising them disappear.
Deficits today constrain growth tomorrow. Persistent borrowing competes with private investment for loanable funds, which can slow the accumulation of capital.
Growth is a supply-side story. Long-run growth comes from expanding productive capacity (capital, labor quality, technology) — not from short-run demand management.
Common exam traps
Don't confuse the deficit with the debt. A country can run a smaller deficit while its total debt still grows — the debt only shrinks if there's a surplus.
The short-run Phillips curve trade-off is not permanent. Don't assume policymakers can permanently buy lower unemployment with a bit more inflation.
The long-run Phillips curve is vertical, not the same shape as the short-run curve. Many students incorrectly draw it sloping.
The money growth rule is a policy proposal, not a law of economics. It reflects the monetarist view that discretionary policy often does more harm than good.
Crowding out reduces, but doesn't necessarily eliminate, the benefits of expansionary fiscal policy. Don't treat it as an automatic full offset.