Chapter 35

Chapter 35 discusses the Phillip curve which describes the negative relationship between inflation and unemployment.  When aggregate demand is expanded, policymakers can select a spot on the Phillip curve higher inflation and lower unemployment. Policymakers can also do the opposite, contracting the aggregate demand and selecting a point with lower inflation and higher unemployment. Thus, through this operation, one can see that there is a trade off between inflation and unemployment. However, this conclusion only holds in the short run. In the long run, the expected inflation adjusts to what occurs in the actual inflation. Thus, the long run curve is vertical at the point of natural rate of unemployment. Changes in aggregate supply can also shift the Phillips curve. An adverse supply change gives policymakers a worse trade off than before between inflation and unemployment. They have to accept a higher rate of inflation for any given rate of unemployment or higher unemployment rate for any given inflation rate. In essence, it becomes out of the policy makers' hands and they have to decide based on what they are given. If the Fed decreases growth in the money  supply to reduce inflation, the economy moves along the short run Phillips curve. This results in temporarily high unemployment. The cost to deflate the economy depends on how fast the expectations of inflation fall.

Chapter 34

Chapter 34 discusses the effect of fiscal and monetary policies on the aggregate demand of an economy. Keynes developed a theory for the short run fluctuations called the the theory of liquidity. This theory explains how interest rates are determined. The interest rates adjust in order for the supply and demand for money to be in an equilibrium. When the price level increases, the money demanded increases due to dollar depreciation and interest rates rise. The higher the interest rate, the  less investment and vice versa. The downward slope of the aggregate demand shows the negative correlation between the price level and the quantity of money demanded.  Policymakers influence the aggregate demand by making monetary policies. These policies cause fluctuations in monetary value. When the money supply is increased, the interest rate equilibrium decreases. This decrease in interest rate shifts the aggregate demand curve to the right.  Decrease in money supply shifts the aggregate demand curve to the left. Fiscal policies can also effect the aggregate demand of an economy. When there is an increase in government purchases or a cut in taxes, the aggregate demand curve shifts right. A decrease in government purchases or increased taxes shift the aggregate demand curve to the left. When the government changes either spending or taxes, the shift in the aggregate demand caused by this can be either smaller or larger than the fiscal change. However, the crowding out effect usually dampens the effect of fiscal policies on demand.

Chapter 33

Chapter 33 begins with the concept of the business cycle, which is the fluctuations in the economy. The fluctuations are caused by recessions or depressions, depending on the severity. Depressions are far worse and uncommon compared to recessions. The real GDP is the most used source to monitor the business cycle's fluctuations. However, fluctuations are still very unpredictable. The classical economic theory states that nominal variables like money supply and price do not effect the real variables such as employment and outputs. However, the flaw of this theory is that is mainly accurate for the long, not short run. Instead, an aggregate supply and demand model is used for the short run. In this model, the supply and demand level out to a balance. The aggregate demand slopes downward because lower price levels increase the money in households that increases spending and lower prices reduce the demand for money so as money is put into assets, interest rates fall, stimulating spending in investments. The final reason is that lower price levels reduces interest rates, depreciates the dollar in  the foreign currency market, increasing the net exports. Policies that increase consumption, government purchases, investment, or net exports increases aggregate demand. Anything that reduces these things has the inverse affect, reducing the aggregate demand. The long run aggregate supply curve is vertical. The supply relies on the labor, capital, natural resources and technology. Three theories are considered for the reason the supply curve slopes upward. Things that change the economy's ability to produce products shift the short term aggregate supply curve and may shift the long term one as well