Part 4/Unit V 483
Teaching Unit V: Stabilization & Growth Policies: Unit V entails the content area of Inflation,
Unemployment, and Stabilization Policies (Content Area V, A-B) and Economic Growth and
Productivity (Content Area VI, A-D) 1
I. Plan (Four phases) Fiscal policy, Monetary Policy, Inflation and Growth
Teaching Materials
Instructors Manual Text readings
Chapter 11 Fiscal Policy: The
Keynesian View and
Historical
Chapter 11, Fiscal Policy: The
Keynesian View and
Historical
Chapter 12 Fiscal Policy:
Incentives
and Secondary Effects
Chapter 12, Fiscal Policy:
Incentives and
Secondary Effects.
Key instructional objectives: Students do the following
Objectives related to fiscal policy (Chapters 11-12)
2. differentiate between discretionary and automatic stabilization policies.
4. calculate and explain the tax multiplier effect.
6. explain the relationship between deficits and surpluses and discretionary fiscal policies.
8. cite advantages and disadvantages of using fiscal policy.
10. compare and contrast the effects of expansionary and contraction fiscal policies, using the
AS/AD Model.
12. identify the fiscal policies that would increase long run growth
identify the major problems of fiscal policy.
Chapter 14 Modern Macroeconomics
Chapter 14, Modern Macroeconomics and
Chapter 15 Stabilization Policy,
Stabilization Policy, Output, and
Chapter 16 Creating an Environment
Chapter 16, Creating an Environment for Growth
Chapter 17, Institutions, Policies and
Cross Country Differences in Income
Chapter 17, Institutions, Policies and Cross
484 Part 4/Unit V
Objectives related to monetary policy (Chapter 14)
1. list and analyze the tools of the Federal Reserve in making monetary policy.
3. explain what happens to the price of a bond when the interest rate changes.
5. analyze how change in money supply functions in the aggregate supply/aggregate demand
model.
7. analyze and explain the short run affects of an expansion/contraction monetary policy.
9. compare and contrast short run and long run monetary policies.
11. analyze the affects of fiscal policy on interest rates and investment.
13. compare and contrast the effectiveness of monetary policy, given anticipated and
Objectives related to basic stabilization, inflation, and the Phillips Curve (Chapter 15)
1. identify reasons for a shifting aggregate demand (AD) curve.
3. use the Aggregate Demand/Aggregate Supply Model (AS/AD) to explain inflation and
inflationary recessions.
5. explain and use adaptive expectations hypothesis and rational expectations hypothesis to
explain inflation and inflationary recessions.
7. explain the short run and long run Phillips curve.
Objectives related to economic growth policies (Chapters 16-17)
1. using the AS/AD model, define and explain how economies can grow while maintaining
price stability.
3. define and explain growth-recessions, stagflation and inflation.
Part 4/Unit V 485
Computational & graphing skills: (Fiscal Policy) Students must complete these tasks
Using a correctly labeled aggregate demand and aggregate supply, long run equilibrium
model, assess the impact of expansionary (restrictive) fiscal policies in the following
situations
o recession
Using a correctly labeled aggregate demand and aggregate supply, long run equilibrium
model and assuming a self-correcting model, assess the changes in the national economy
in the following situations.
o recession
o stagflation
Using a correctly labeled aggregate demand and aggregate supply, long run equilibrium
model, show distinctions of an expansionary (restrictive) fiscal policy using
o taxation policies
o government expenditures
o combination of taxation and government expenditure policies
Computational & graphing skills: (Monetary Policy) Students must complete these tasks
Illustrate the effects on money supply and interest rate of an increase (decrease) in the
money supply.
Computational & graphing skills: (Stabilization Policy) Students must complete these tasks
Graph the short run tradeoffs between inflation and unemployment, using the Phillips
Curve
Use an AS/AD illustration with an increase in AD to explain the movements along a
Phillips Curve.
486 Part 4/Unit V
Computational & graphing skills: (Growth) Students must complete these tasks
Model economic growth, using production possibility models
Model economic growth, using aggregate demand and aggregate supply graphs.
Formative Signals: The following content and skill areas have been identified as areas of
weakness for students based upon past objective and free response examinations.
Objective Formative Signals:
Based upon the released
Free response Formative
Signals: Past students have
Problematic fiscal policy
questions
recommend the course of action if
government increases spending without
causing inflation in the short run
compare and contrast expansionary
Problematic fiscal policy
questions
understand link between expansionary
fiscal policy and interest rates and bond
prices
explain expansionary fiscal policy that
Part 4/Unit V 487
Objective Formative Signals:
Based upon the released
Free response Formative
Signals: Past students have
describe policy mix (monetary and fiscal)
to increase levels of investment leading to
real changes in GDP
Problematic monetary policy
questions
understand meaning of MV=PQ
understand conditions that would yield
supply increases national output
define federal fund rate
understand quantity of theory of money,
given a change in the MS and impacts on
output and price levels
Problematic stabilization
questions
Problematic monetary policy
questions
understand expansionary monetary policy–
must focus on the process, not just the
results; show linkages between the FED;
understand link between expansionary
demand-deposits)
understand reasons why deposit expansion
Problematic stabilization
policy questions
distinguish between short run Phillips
Curve and aggregate demand curve in
the AS/AD model
Objective Formative Signals:
Based upon the released
Free response Formative
Signals: Past students have
identify cause of a simultaneous increase in
inflation and in unemployment
recognize assumptions of rational
expectations
understand Phillips Curve and trade-offs
between actual and expected rates of
inflation
of the shift in the short run Phillips
Curve
understand the long run Phillips Curve
and give the reasons for its vertical line
Problematic growth policy
questions
understand why and how economic growth
occurs
understand how GDP increases as a result
I. Teach Fiscal Policy
Recommended sequence of instruction for fiscal policy. Teach policy concepts in this
sequence
Chapter 11
Fiscal Policy: The Keynesian View and Historical Perspective
1. THE KEYNESIAN VIEW OF FISCAL POLICY, P. 220
Part 4/Unit V 489
Deficits versus surpluses
2. FISCAL POLICY CHANGES AND PROBLEMS OF TIMING, P. 224
3. THE KEYNESIAN AGGREGATE EXPENDITURE MODEL, ONLINE APPENDIX
(Teacher NOTE: Optional, Teach, and/or review. While the AE Model is not subject
to current testing by the AP* Economics Examination Committee, the concepts and
Chapter 12
Fiscal Policy: Incentives and Secondary Effects
1. FISCAL POLICY, BORROWING AND THE CROWDING-OUT EFFECT, P. 230
2. FISCAL POLICY, FUTURE TAXES, AND THE NEW CLASSICAL MODEL. P. 233
3. POLITICAL INCENTIVES AND THE EFFECTIVE USE OF DISCRETIONARY
FISCAL POLICY, P. 35
4. FISCAL POLICY AND RECOVERY FROM RECESSIONS, P. 240
5. SUPPLY SIDE EFFECTS OF FISCAL POLICY, P. 236
490 Part 4/Unit V
III. Assess Fiscal Policy Suggestions for determining what and how much students have learned
concerning fiscal policy
Key conceptual questions related to fiscal policy: Students demonstrate their understanding of
the material by answering the following key conceptual questions
1. What is fiscal policy?
2. What is the reason that the taxation multiplier is less than the government expenditure
multiplier?
3. What is an output gap, and how can fiscal policy eliminate it?
4. What is an expansionary gap, and how can fiscal policy eliminate it?
5. What is automatic fiscal policy, and how does it lend stability to an economy?
6. How does fiscal policy affect AD and/or AS?
7. What is crowding out? Explain and Illustrate
8. What is supply side fiscal policy?
9. How do the affects of fiscal policy in the Keynesian Model compare with the fiscal
policies of the AS/AD model? Explain and illustrate
10. What are the different combinations of fiscal and monetary policy?
11. What are the affects of using monetary policy and/or fiscal policy on interest rates, price
stability, employment, and national income?
12. What are the policies used to promote national output, employment and price stability?
Past Objective AP Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related fiscal policy
Tasks related to fiscal policy
predict policy action (taxes and/or government spending, given novel data on equilibrium
output and FE output. identify fiscal policy to reach full employment, given a novel graph
illustrating current economic situation
recommend fiscal policies for eliminating inflationary gaps
compare and contrast expansionary monetary policies with fiscal policies in an attempt to
curtail a recession
Part 4/Unit V 491
make fiscal recommendation to deal with periods of high unemployment and low inflation
identify and discriminate most effective fiscal policy programs given a recession
recognize conditions under which fiscal policy is most effective
recognize a fiscal policy that would reduce unemployment
identify fiscal policy to reach full employment, given a novel graph illustrating current
economic situation
recommend fiscal policies for eliminating inflationary gaps
make fiscal recommendation to deal with periods of high unemployment and low inflation
identify and discriminate most effective fiscal policy programs given a recession
recognize conditions under which fiscal policy is most effective
recognize a fiscal policy that would reduce unemployment
understand the effects of expansionary fiscal policy within the three ranges of the SRAS
understands budget balance multiplier
predict combinations of government spending and taxes that would yield greatest increases
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related fiscal policy
1989-1997, assess the combined actions of fiscal and monetary policies; analyze offsetting
policies and complementary policies.
1997, compare of Keynesian and Monetarist assumptions concerning demand for money
and real interest rate as well as an assessing the relative impact of a monetary policy given
the money and interest rate assumptions of Keynesians and Monetarists.
1999, how changes in demand for money affect investment; international value of the
dollar and exports; how changes in fiscal policy affect output, price level, nominal interest
rates and price of bonds; identify a monetary policy to counter the effects of increased
interest rates
492 Part 4/Unit V
I. Teach Monetary Policy
Recommended sequence of instruction for monetary policy. Teach policy concepts in this
sequence
Chapter 14
Modern Macroeconomics and Monetary Policy,
1. HOW DOES MONETARY POLICY AFFECT THE ECONOMY? , P. 276
2. MONETARY POLICY IN THE LONG RUN, P. 281
Using the equation of exchange (MV*PQ), explain the long run effects of monetary
policy, assuming unanticipated changes in money supply
Explain the short run and long run issues and potential complications of using monetary
policy
III. Assess Monetary Policy Suggestions for determining what and how much students have
learned concerning monetary policy
Part 4/Unit V 493
Key conceptual questions related to monetary policy: Students demonstrate their
understanding of the material by answering the following key conceptual questions
1. What determines the short run federal fund interest rate?
2. What is the difference between the loanable fund interest rate and the federal fund interest
rate?
3. What is monetary policy and what are the tools of the FED to implement the policy?
Past Objective AP* Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related to monetary policy
understand how commercial banks create money
calculate expansion of MS, given reserve requirements and excess reserve information
calculate new money to be created, given required reserve and excessive reserves
predict result in banking systems, given public desire to hold more money as currency
recognize ways in which FED can increase money supply
describe and understand open market operations
understand effects of a lower reserve requirement
rates
predict effects of the central bank selling securities in the open market
define federal fund rate
understand quantity of theory of money, given a change in the MS and impacts on output
and price levels
understand MV=PQ
recognize limitation of monetary policy (banking systems)
know policies of FED to change money supply
predict action of FED, given inflation/recessionary conditions
494 Part 4/Unit V
Tasks related to a combination of fiscal and monetary policy
understand how to eliminate inflationary gaps using monetary and fiscal policy options
recommend appropriate fiscal and monetary policy, given a novel scenario where the
economy is in a recession.
recognize combination of monetary and fiscal policies that would increase AD
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to monetary policy
1997, impact of monetary/fiscal policy on international value of dollar
1989-1997, assess the combined actions of fiscal and monetary policies; analyze
offsetting policies and complementary policies
1996, explain impact of a deposit on bank reserves, loaning ability and total money supply
1996, describe open market operations to solve for inflationary conditions; explain