• Combination of fiscal and monetary policies
• Expansionary fiscal + expansionary monetary: Strong stimulus, lower interest rates (if monetary dominates)
• Expansionary fiscal + contractionary monetary: Higher interest rates, crowding out, currency appreciates
• Contractionary fiscal + expansionary monetary: Lower interest rates, currency depreciates
• Policy coordination important for macroeconomic stability

• Short run: Both fiscal and monetary policy affect AD
• Expansionary policy -> AD shifts right -> P up , Y up
• Contractionary policy -> AD shifts left -> P down , Y down
• Multiplier effects amplify impact of changes
• Short-run output gaps can be closed by policy

• Inverse relationship between inflation and unemployment
• Downward sloping: lower unemployment associated with higher inflation
• Tradeoff exists in short run due to sticky wages and prices
• SRPC equation: π = πe - β(u - u*) + supply shock
• Each SRPC associated with specific expected inflation rate

• Vertical at natural rate of unemployment (u)*
• No long-run tradeoff between inflation and unemployment
• In long run, expected inflation equals actual inflation -> unemployment returns to NRU
• Monetary policy neutrality: only affects price level, not real variables
• Any attempt to keep unemployment below NRU causes accelerating inflation

• AD shift right (expansionary) -> P up , Y up -> inflation up , unemployment down (movement along SRPC)
• SRAS shift left (negative supply shock) -> P up , Y down -> inflation up , unemployment up (SRPC shifts right)
• SRAS shift right (positive supply shock) -> P down , Y up -> inflation down , unemployment down (SRPC shifts left)
• AD-AS model explains Phillips curve shifts

• Government deficit spending -> increased borrowing -> higher real interest rates -> private investment decreases
• Long-run consequence: Lower capital stock -> lower potential GDP -> reduced economic growth
• More significant when economy near or at full employment
• Reduces effectiveness of expansionary fiscal policy in long run

• Budget deficit = G - T (government spending minus tax revenue)
• Financed by borrowing from public (selling bonds)
• Accumulated deficits = national debt
• Short-run benefit: stimulates AD during recession
• Long-run cost: higher debt service (interest payments), crowding out, possible fiscal crisis

• Sum of all past budget deficits minus surpluses
• Debt-to-GDP ratio important measure of sustainability
• High debt can lead to:
• Higher interest rates (risk premium)
• Reduced fiscal space for future crises
• Potential default or inflation (if monetized)
• Intergenerational burden (future taxpayers pay)

• Shows relationship between saving and investment
• Government deficit shifts demand for loanable funds right
• Higher real interest rate -> private investment decreases
• Long-run growth reduced (less investment in capital, technology)
• Equilibrium shows crowding out mechanism

Quantity Theory of Money MV=PY:

• Equation of Exchange: M × V = P × Y
• M = money supply
• V = velocity of money (average times a dollar is spent)
• P = price level
• Y = real output (GDP)
• Assuming V and Y constant in long run: M up -> P up proportionally
• Inflation is primarily a monetary phenomenon in long run
• Implication: Central bank controls inflation through money supply

• Average number of times a unit of money is spent in a period
• V = PY / M = nominal GDP / money supply
• Relatively stable in short run, influenced by:
• Financial innovation (ATMs, credit cards)
• Interest rates (higher rates -> less money held -> V up )
• Payment habits
• If V falls while M rises, inflation may be less than expected

• Deficit: G > T (government spending exceeds revenue)
• Financed by borrowing from public or foreign lenders
• Increases national debt
• Surplus: T > G (revenue exceeds spending)
• Used to pay down national debt
• Rare in recent US history
• Balanced budget: G = T (no borrowing needed)

• Government deficit -> increased borrowing -> demand for loanable funds shifts right
• Real interest rate rises
• Private investment decreases (crowding out)
• National saving = private saving - government deficit
• Lower national saving -> less investment -> slower long-run growth

• Government borrowing increases demand for loanable funds
• Higher interest rates make borrowing more expensive for businesses
• Investment decreases (interest-sensitive component of AD)
• Reduction in investment reduces capital accumulation
• Lower capital stock -> lower potential GDP -> reduced economic growth

• Short run: Deficit spending can increase output during recession
• Long run: Crowding out reduces investment and growth
• Net effect depends on state of economy:
• Recession: minimal crowding out (resources idle)
• Full employment: significant crowding out (resources scarce)
• Intergenerational burden: future debt service costs

• Output per worker = Total output / Number of workers
• Key determinant of standard of living
• Increases due to:
• Physical capital accumulation (more machines per worker)
• Human capital improvement (education, training)
• Technological progress (better methods)
• Institutional quality (property rights, rule of law)
• Higher productivity -> higher potential GDP -> economic growth

• Machinery, equipment, structures used to produce goods and services
• Increases productivity: more capital per worker -> higher output per worker
• Diminishing returns: each additional unit of capital increases output by less
• Depreciation: capital wears out over time, must be replaced
• Financed through saving (domestic or foreign) and investment

• Education, training, health that increases worker productivity
• More productive workers earn higher wages and produce more output
• Long-term investment with delayed but persistent returns
• Includes formal education, on-the-job training, health improvements
• Social returns often exceed private returns (positive externalities)

• Technological progress most important source of long-run growth
• Research and development (R&D) creates new products and processes
• Knowledge has characteristics of public good (non-rival, partially non-excludable)
• Spillovers: benefits spread beyond inventor (positive externalities)
• Government role: fund basic research, protect intellectual property, education

• Policies to increase potential output (shift LRAS right)
• Examples:
• Tax incentives for investment and work
• Deregulation to reduce business costs
• Education and training programs
• Infrastructure investment
• Research and development subsidies
• Property rights protection
• Contrast with demand-side policies (shift AD)

• Government investment in public capital: roads, bridges, airports, utilities
• Increases productivity: reduces transportation costs, improves communication
• Provides public goods that private sector underprovides
• Can create jobs in short run, increase capacity in long run
• High returns during recession (idle resources) or in developing countries