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Unit 5 · Long-Run Consequences of Stabilization Policies Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice

AP Macroeconomics Unit 5 Visual Review

An 8-slide visual review of Long-Run Consequences of Stabilization Policies — money growth, the Phillips curve, and debt/growth tradeoffs, built right into the page.

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UNIT 5 · SLIDE 1 The Short-Run Phillips Curve A — boom B — recession SRPC Inflation rate Unemployment rate The short-run tradeoff Low unemployment tends to come with high inflation, and vice versa — you slide ALONG the curve. Each SRPC point mirrors an AD/AS equilibrium. A = inflationary gap · B = recessionary gap Movements vs. shifts AD shifts → movement ALONG the SRPC AD right → up-left (inflation↑, unemployment↓) AD left → down-right (inflation↓, unemployment↑) SRAS shifts → the whole SRPC SHIFTS (Slide 2) Demand moves you along; supply moves the curve. The SRPC is the AD/AS model in different axes — every gap has a matching Phillips point. The Review Hub · AP Macroeconomics Unit 5
The SRPC shows the short-run tradeoff: less unemployment, more inflation. AD shifts move you along the curve; supply shocks shift it.
UNIT 5 · SLIDE 2 The Long-Run Phillips Curve LRPC SRPC₁ SRPC₂ natural rate Inflation rate Vertical at the natural rate In the long run there is NO tradeoff — unemployment returns to its natural rate at ANY inflation rate. LRPC is the LRAS curve in Phillips-space What shifts the curves SRPC shifts RIGHT/UP: negative supply shock or higher inflation expectations (= stagflation) SRPC shifts LEFT/DOWN: positive supply shock or lower expectations LRPC shifts only if the NATURAL RATE changes (demographics, job-matching efficiency, structural change) Stagflation = SRPC shifted right — high inflation AND high unemployment at once. The Review Hub · AP Macroeconomics Unit 5
The LRPC stands vertical at the natural rate — no long-run tradeoff. Supply shocks and inflation expectations shift the SRPC; only changes in the natural rate itself move the LRPC.
UNIT 5 · SLIDE 3 The Quantity Theory of Money M × V = P × Q The four letters M — money supply V — velocity: times each dollar is spent per year P — price level Q — real output (real GDP) V is stable and Q is fixed by resources in the long run → any M growth flows straight into P. Money neutrality (long run) Doubling the money supply eventually just doubles prices — real GDP, employment, and the real interest rate end up UNCHANGED. Short run: money moves REAL variables (Unit 4) Long run: money only moves NOMINAL ones "Inflation is always and everywhere a monetary phenomenon." — Milton Friedman Sustained money growth faster than output growth → inflation, one-for-one in the long run. The Review Hub · AP Macroeconomics Unit 5
MV = PQ. With velocity stable and output fixed by real resources, long-run money growth becomes inflation — and money is neutral: real variables don't change.
UNIT 5 · SLIDE 4 Deficits vs. Debt Budget DEFICIT — a flow one year's shortfall Spending > tax revenue in a single year Financed by SELLING BONDS (borrowing) Surplus = the opposite (revenue > spending) Expansionary fiscal policy usually widens the deficit National DEBT — a stock the accumulated total Sum of ALL past deficits minus surpluses Grows every year the budget runs a deficit Requires ongoing interest payments Interest costs squeeze future budgets Why economists worry about persistent deficits Government borrowing competes with private borrowers in the loanable funds market, pushing real interest rates up and private investment down — crowding out (next slide). A "flow vs. stock" MCQ shows up almost every year — deficit fills the debt bathtub. The deficit is the faucet; the debt is the bathtub it fills year after year. The Review Hub · AP Macroeconomics Unit 5
Deficit = one year's shortfall (a flow); debt = all accumulated deficits (a stock). Deficits are financed by selling bonds — which is exactly what sets up crowding out.
UNIT 5 · SLIDE 5 Crowding Out S D₁ D₂ r₂ r₁ Real interest rate Loanable funds The mechanism Deficit spending → government borrows → demand for loanable funds shifts RIGHT (D₁ → D₂) → real interest rate rises (r₁ → r₂) → private investment spending falls. Private borrowers get "crowded out" of the market. The long-run cost Less investment today → smaller capital stock tomorrow → slower LRAS / PPC growth. Stimulus buys output now at the price of some future growth — the classic policy tradeoff. FRQ chain: deficit → borrow → D for loanable funds right → real r ↑ → private I ↓. The Review Hub · AP Macroeconomics Unit 5
Government borrowing shifts loanable-funds demand right, raising the real rate and squeezing out private investment. The long-run cost: a smaller capital stock and slower growth.
UNIT 5 · SLIDE 6 What Actually Drives Long-Run Growth Productivity is the engine Output per worker determines living standards. Growth = growing productivity, not just more hours. Its three sources Physical capital · human capital (education, skills) · technology. All three raise output per worker. Pro-growth policies Incentives for saving & investment, education funding, R&D support, stable institutions. How growth shows on graphs LRAS shifts right = PPC shifts outward = natural-rate output (Yf) rises over time. The measure that matters Economic growth = sustained increase in REAL GDP PER CAPITA Adjusts for inflation and population — a bigger population alone is not growth in living standards Policies that boost investment and human capital shift LRAS right — everything else is short-run. The Review Hub · AP Macroeconomics Unit 5
Long-run growth comes from productivity: physical capital, human capital, and technology. It appears as a rightward LRAS shift (= outward PPC shift) and is measured in real GDP per capita.
UNIT 5 · SLIDE 7 Combining Fiscal & Monetary Policy Both expansionary Output: rises strongly (both push AD right) Interest rate: AMBIGUOUS — fiscal pushes r up, monetary pushes it down Classic pandemic-response combo Both contractionary Output: falls strongly (both pull AD left) Interest rate: AMBIGUOUS — opposite pressures again, in reverse Used against entrenched inflation Expansionary fiscal + tight money Interest rate: rises strongly (both push r up) Output: AMBIGUOUS — policies pull AD in opposite directions Heavy crowding-out pressure on investment Tight fiscal + easy money Interest rate: falls strongly (both push r down) Output: AMBIGUOUS — offsetting AD effects Investment-friendly mix: low r encourages capital formation → better long-run growth Same-direction policies → output certain, r ambiguous · Opposite policies → r certain, output ambiguous When two policies combine, one variable is always ambiguous — the single most classic Unit 5 MCQ. The Review Hub · AP Macroeconomics Unit 5
Policy combos: same direction → output effect is certain but the interest rate is ambiguous; opposite directions → the interest rate is certain but output is ambiguous. Memorize the 2×2.
UNIT 5 · SLIDE 8 Unit 5 Quick Reference — Know These Cold Phillips curves SRPC: down-sloping · AD moves you ALONG it Supply shocks & expectations SHIFT it LRPC: vertical at the natural rate Stagflation = SRPC shifted right Money in the long run MV = PQ · V stable, Q resource-fixed M growth → proportional P growth (inflation) Money neutrality: real variables unchanged Short run ≠ long run — money matters short-run Deficits, debt & crowding out Deficit = yearly flow · Debt = accumulated stock Borrowing → D for funds right → r↑ → private I↓ Long-run cost: smaller capital stock, slower LRAS Draw it on the loanable funds graph Growth & policy mix Growth = productivity: capital, human capital, tech Measured by real GDP per capita · LRAS right Policy combos: one variable always ambiguous Same direction → r ambiguous · opposite → Y ambiguous Unit 5 is 20–30% of the exam — the heaviest-weighted unit. Phillips curve + crowding out are FRQ staples. The Review Hub · AP Macroeconomics Unit 5
Phillips curves, money neutrality, deficits vs. debt, crowding out, and growth drivers — Unit 5 carries the biggest exam weight, so drill these until automatic.
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How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core diagram you need to remember from Unit 5.