2. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
Q
Q
Robots(thousands)
Pizzas (thousands)
14
13
12
11
10
9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8
A
B
C
D
E
W
Attainable
but
Inefficient
Unattainable
Attainable
& Efficient
PRODUCTION POSSIBILITIES
3. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
Production Possibilities Curve
Shows:
• Opportunity Cost: More pizzas means less
robots
• Unemployment / Inefficiency: Inside the curve
• Efficiency: On the curve
• Economic Growth: Curve shifts to the right
4. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD
AGGREGATE DEMAND / AGGREGATE SUPPLY:
Long-run equilibrium
Equilibrium
Real Output
Y f
PL
LRAS
5. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD
AS/AD: Recession
(Recessionary Gap)
Equilibrium
Real Output
LRAS
Long Run Aggregate
Supply (Full Employment)
Y 1
PL 1
Y f
6. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
PriceLevel
Real Domestic Output, GDP
Q
P AS
AD
AS/AD: Inflation: Beyond Full Employment
(Inflationary Gap)
Equilibrium
Real Output
LRAS
Long Run Aggregate
Supply (Full Employment)
Y f Y 1
PL 1
7. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
PriceLevel
Real Domestic Output, GDP
Q
P ASAD1
INCREASES IN AD:
DEMAND-PULL INFLATION
P2
P1
AD2
Yf Y1
8. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
PriceLevel
Real Domestic Output, GDP
Q
P AS1
AD1
DECREASES IN AS:
COST-PUSH INFLATION
P2
Y 1Y 2
AS2
P1
9. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
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
10. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
NOMINALinterestrate,i
Quantity of Money
Dm
Sm
THE MONEY MARKET
Shift the Supply curve
(always vertical) when FED
changes the money supply to
change nominal interest
rates!
i
•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
11. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
Real domestic output, GDP
Dm
Investment
Demand Graph
rateofinterest,i
10
8
6
0
Qty. of Money Amount of investment, I
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1
AS
AD1(I=$15)
P1
10
8
6
0
Sm2
AD3(I=$25)
P2
If the Money Supply
Increases to Stimulate
the Economy…
Interest Rate Decreases
Investment Increases
AD & GDP Increases
with slight inflation
Pricelevel
AD2(I=$20)
P3
Sm3
Increasing money supply
continues the growth –
but, watch Price Level.
ID
rateofinterest,i
Money Market
Graph
12. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
RealInterestRate,r
Quantity of Loanable Funds
LOANABLE FUNDS MARKET
r
D lf
Q
S lf
This graph shows
how the supply and
demand for loanable
funds affects real
interest rates!
13. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
Loanable Funds Market Graph
(Long-Term Interest Rates)
What changes Supply:
1. Increase in
Household savings
2. Increase in Gov’t
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
gov’t has a budget
deficit!) = (the crowding
-out effect)
14. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
The Market for Yen
Quantity of Yen
DollarPriceofaYen
0
P
QQe
Sy
Dy
THE FOREIGN EXCHANGE MARKET
15. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
P
Q
Dy
Sy
DollarpriceofaYen
Quantity of Yen
3
2
1
Dollar
depreciates
Dollar
appreciates
The Market for Yen
THE FOREIGN EXCHANGE MARKET
16. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
Annualrateofinflation
(percent)
Unemployment rate (percent)
7
6
5
4
3
2
1
0
1 2 3 4 5 6 7
As inflation declines...
THE PHILLIPS CURVE CONCEPT
unemployment
increases
And vice versa!
SRPC
17. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
Annualrateofinflation
(percent)
Unemployment rate (percent)
7
6
5
4
3
2
1
0
1 2 3 4 5 6 7
THE PHILLIPS CURVE CONCEPT
SRPC 1
LRPC = Is the natural
Rate of Unemployment
SRPC 2
With Stagflation, Shift
SRPC to the right
With AD shift,
move along
existing SRPC
With AS shift,
shift SRPC
18. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
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)
19. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
TWO WAYS TO SHOW ECONOMIC GROWTH
A
B
C
D
CapitalGoods
Consumer Goods
PriceLevel
Real GDP
ASLR1 ASLR2
Q1 Q2
20. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
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
5. Increase in size of the Labor Force.
21. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
BUSINESSES HOUSEHOLDS
RESOURCES
INPUTS
$ COSTS $ INCOMES
PRODUCT
MARKET
GOODS &
SERVICES
GOODS &
SERVICES
$ CONSUMPTION$ REVENUE
GOVERNMENT
RESOURCE
MARKET
Circular Flow Model
Injections:
Investment,
Government
Spending,
Exports
Leakages:
Savings,
Taxes,
Imports
