Redelsheimers Graphs to Know AP Macro Review Copyright 2005

PRODUCTION POSSIBILITIES
Q 14 Robots (thousands)
13 12 11 10 9 8 7 6 5 4 3 2 1

Unattainable
A B C D W

Attainable but Inefficient

E
1 2 3

Attainable & Efficient

4 5 6 7 Pizzas (thousands)

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

Production Possibilities Curve

Shows: Opportunity Cost: More pizzas means less robots Unempolyment / Inefficiency: Inside the curve Efficiency: On the curve Economic Growth: Curve shifts to the right

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

AGGREGATE DEMAND / AGGREGATE SUPPLY

AS

Price Level

Equilibrium Real Output

P

AD
Y

Real Domestic Output, GDP

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

AS/AD: Recession
Long Run Aggregate Supply (Full Employment)

ASLR

AS

Price Level

Equilibrium Real Output

P

AD
Y

Real Domestic Output, GDP

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

AS/AD: Inflation: Beyond Full Employment

P

ASLR

Long Run Aggregate Supply (Full Employment)

AS

Price Level

Equilibrium Real Output

AD

Y f

Y 1

Real Domestic Output, GDP

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

INCREASES IN AD: DEMAND-PULL INFLATION

P
AD1 AD2
AS

Price Level

P2

P1

Yf

Y1

Real Domestic Output, GDP

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

DECREASES IN AS: COST-PUSH INFLATION

P
AS2 AS1

Price Level

P2

P1

AD1
Y2 Y1

Real Domestic Output, GDP

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

AGGREGATE SUPPLY / AGGREGATE DEMAND

SHOWS: National Output: (Real GDP) Employment and Unemployment Price Level
Aggregate Demand Curve Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect
Redelsheimers Graphs to Know AP Macro Review Copyright 2005

THE MONEY MARKET

Sm
NOMINAL interest rate, i

Shift the Supply curve (always vertical) when FED changes the money supply to change nominal interest rates!
If Nominal GDP Increases, Transactions Demand increases, and Dm Curve Shifts to the right. If Asset Demand for money increases, Dm Curve shifts to right

Dm
Quantity of Money

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

MONETARY POLICY AND EQUILIBRIUM GDP

Sm1 Sm2
Money Market
rate of interest, i

Sm3
10 8

Investment Demand Graph

Graph
rate of interest, i 10 8 6

6
0

0
Qty. of Money

Dm
AS

ID
Amount of investment, I

P3 P2 P1
AD3(I=$25) AD2(I=$20) AD1(I=$15)

Real domestic output, GDP

If the Money Supply Increases to Stimulate the Economy Interest Rate Decreases Investment Increases AD & GDP Increases with slight inflation Increasing money supply continues the growth but, watch Price Level.

Price level

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

LOANABLE FUNDS MARKET

S
Real Interest Rate, r
This graph shows how the supply and demand for loanable funds affects real interest rates!

D
Q
Quantity of Loanable Funds
Redelsheimers Graphs to Know AP Macro Review Copyright 2005

Loanable Funds Market Graph

(Long-Term Interest Rates)

What changes Supply: 1. Increase in Household savings 2. Increase in Govt savings 3. Increase in Business savings 4. Increase in Business savings 5. Increase in Foreigners savings

What changes Demand: 1. Increase in Household borrowing 2. Increase in business Investment 3. Increase in Foreign borrowing 4. Increase in Government borrowing (When the govt has a budget deficit!) = (the crowding -out effect)

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

THE FOREIGN EXCHANGE MARKET

The Market for Yen

P
Sy Dollar Price of 1 Yen

Dy 0

Qe Quantity of Yen
Redelsheimers Graphs to Know AP Macro Review Copyright 2005

THE FOREIGN EXCHANGE MARKET

The Market for Yen

P Sy

Dollar price of one Yen

Dollar depreciates Dollar appreciates

Dy
Quantity of Yen
Redelsheimers Graphs to Know AP Macro Review Copyright 2005

THE PHILLIPS CURVE CONCEPT

7

Annual rate of inflation (percent)

6 5

As inflation declines...

4
3 2 1 0 1 2 3

unemployment increases
And vice versa!

SRPC

Unemployment rate (percent)

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

THE PHILLIPS CURVE CONCEPT

LRPC = Is the natural
7
Rate of Unemployment
With Stagflation, Shift SRPC to the right
With AD shift, move along existing SRPC

Annual rate of inflation (percent)

6 5 4 3

2
1 0 1 2 3 4 5 6 7
SRPC 1

SRPC 2

Unemployment rate (percent)

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

Phillips Curve
Short run trade-off between inflation and unemployment. In the Long Run there is no trade off. The long run Phillips curve is Vertical! Stagflation (an increase in Unemployment and inflation) or an Aggregate Supply Shock will shift the SRPC to the right. Decreases in Inflation and Unemployment will shift the SRPC to the left. (and increase in AS would cause this)
Redelsheimers Graphs to Know AP Macro Review Copyright 2005

TWO WAYS TO SHOW ECONOMIC GROWTH

ASLR1 ASLR2

A Capital Goods Price Level B Consumer Goods Q1 Q2 Real GDP Redelsheimers Graphs to Know AP Macro Review Copyright 2005 D

Causes of Economic Growth

1. Increased investments in Capital Stock. 2. Increased investments in Human Capital (education, training) and increases in quantity of human resources 3. New Technology leading to increased productivity 4. Increase in quantity and quality of natural resources

Redelsheimers Graphs to Know AP Macro Review Copyright 2005

Circular Flow Model

$ COSTS
RESOURCE MARKET

$ INCOMES

RESOURCES

INPUTS

BUSINESSES

GOVERNMENT

HOUSEHOLDS

GOODS & SERVICES

PRODUCT MARKET

GOODS & SERVICES

$ REVENUE

$ CONSUMPTION
Redelsheimers Graphs to Know AP Macro Review Copyright 2005