The document presents several key graphs that are important for the AP Macroeconomics exam, including: 1) The production possibilities curve shows opportunity cost and inefficiency inside the curve, with efficiency on the curve. The curve shifts right with economic growth. 2) The aggregate demand/aggregate supply model shows equilibrium, recession with a recessionary gap, and inflation beyond full employment with an inflationary gap. 3) The money market graph shows how the Federal Reserve uses monetary policy to shift the money supply curve and change nominal interest rates. 4) The Phillips curve shows the short-run tradeoff between inflation and unemployment, and how it can shift due to supply shocks. In the long-run

1. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010GRAPHS 2 KNOWFOR THE AP MACROEXAMINATIONAP Macroeconomics2010

2. PRODUCTION POSSIBILITIESQ1413121110 9 8 7 6 5 4 3 2 1UnattainableABCWAttainable& EfficientDRobots (thousands)AttainablebutInefficientEQ 1 2 3 4 5 6 7 8Pizzas (thousands)“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

3. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Production Possibilities CurveShows: Opportunity Cost: More pizzas means less robotsUnemployment / Inefficiency: Inside the curveEfficiency: On the curveEconomic Growth: Curve shifts to the right

4. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010AGGREGATE DEMAND / AGGREGATE SUPPLYPASEquilibriumReal OutputPrice LevelPADQY Real Domestic Output, GDP

5. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010AS/AD: Recession(Recessionary Gap)Long Run Aggregate Supply (Full Employment)ASLRPASEquilibriumReal OutputPrice LevelPADQY Real Domestic Output, GDP

6. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010AS/AD: Inflation: Beyond Full Employment(Inflationary Gap)Long Run Aggregate Supply (Full Employment)ASLRPASEquilibriumReal OutputPPrice LevelADQY fY 1Real Domestic Output, GDP

7. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010INCREASES IN AD: DEMAND-PULL INFLATIONPASAD1AD2P2Price LevelP1QY1YfReal Domestic Output, GDP

8. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010DECREASES IN AS: COST-PUSH INFLATIONAS2PAS1P2Price LevelP1AD1QY1Y 2Real Domestic Output, GDP

9. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010AGGREGATE SUPPLY / AGGREGATE DEMANDSHOWS: National Output: (Real GDP)Employment and UnemploymentPrice LevelAggregate Demand CurveDown Sloping Due To: Real-Balances Effect

10. Interest-Rate Effect

11. Foreign Purchases Effect“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010THE MONEY MARKETShift the Supply curve (always vertical) when FED changes the money supply to change nominalinterest rates! SmIf Nominal GDP Increases, Transactions Demand increases, and Dm Curve Shifts to the right.

12. If Asset Demand for money increases, Dm Curve shifts to rightNOMINAL interest rate, iiDmQuantity of Money

13. MONETARY POLICY AND EQUILIBRIUM GDPSm1Sm2Sm3InvestmentDemand GraphMoney Market Graph10 8 6 010 8 6 0rate of interest, irate of interest, iDmIDQty. of MoneyAmount of investment, IIf the Money SupplyIncreases to Stimulatethe Economy…ASInterest Rate DecreasesP3Investment IncreasesPrice levelAD & GDP Increases with slight inflationP2AD3(I=$25)P1Increasing money supply continues the growth – but, watch Price Level.AD2(I=$20)AD1(I=$15)Real domestic output, GDP“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

14. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010LOANABLE FUNDS MARKETSThis graph shows how the supply and demand for loanable funds affects real interest rates!Real Interest Rate, rrDQQuantity of Loanable Funds

15. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Loanable Funds Market Graph(Long-Term Interest Rates)What changes Supply: Increase in Household savingsIncrease in Gov’t savingsIncrease in Business savingsIncrease in Business savingsIncrease in Foreigners’ savingsWhat changes Demand: Increase in Household borrowingIncrease in business InvestmentIncrease in Foreign borrowingIncrease in Government borrowing (When the gov’t has a budget deficit!) = (the crowding -out effect)

16. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010THE FOREIGN EXCHANGE MARKETThe Market for YenPSyDollar Price of a YenDy0QQeQuantity of Yen

17. THE FOREIGN EXCHANGE MARKETThe Market for YenPSy321DollardepreciatesDollar price of a YenDollarappreciatesDyQQuantity of Yen“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

18. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010THE PHILLIPS CURVE CONCEPT76543210As inflation declines...Annual rate of inflation(percent)unemployment increasesAnd vice versa!SRPC1 2 3 4 5 6 7Unemployment rate (percent)

19. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010THE PHILLIPS CURVE CONCEPTLRPC = Is the naturalRate of Unemployment76543210With Stagflation, Shift SRPC to the rightWith AD shift, move along existing SRPCAnnual rate of inflation(percent)With AS shift, shift SRPCSRPC 2SRPC 11 2 3 4 5 6 7Unemployment rate (percent)

20. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Phillips CurveShort 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)

21. TWO WAYS TO SHOW ECONOMIC GROWTHASLR1ASLR2CAPrice LevelCapital GoodsBDQ1Q2Consumer GoodsReal GDP“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

22. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Causes of Economic Growth1. Increased investments in Capital Stock. 2. Increased investments in Human Capital (education, training) and increases in quantity of human resources3. New Technology leading to increased productivity4. Increase in quantity and quality of natural resources

23. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Circular Flow Model$ COSTS$ INCOMESRESOURCEMARKETRESOURCESINPUTSBUSINESSESGOVERNMENTHOUSEHOLDSGOODS &SERVICESGOODS &SERVICESPRODUCTMARKET$ CONSUMPTION$ REVENUE