Graphs 2 Know For The AP Macro Economics Exam

“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
GRAPHS 2 KNOW
FOR THE AP MACRO
EXAMINATION
AP Macroeconomics
2010

PRODUCTION POSSIBILITIES
Q
14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
B
C
W
Attainable
& Efficient
D
Robots (thousands)
Attainable
but
Inefficient
E
Q
1 2 3 4 5 6 7 8
Pizzas (thousands)

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

AGGREGATE DEMAND / AGGREGATE SUPPLY
P
AS
Equilibrium
Real Output
Price Level
P
AD
Q
Y
Real Domestic Output, GDP

AS/AD: Recession
(Recessionary Gap)
Long Run Aggregate
Supply (Full Employment)
ASLR
P
AS
Equilibrium
Real Output
Price Level
P
AD
Q
Y

AS/AD: Inflation: Beyond Full Employment
(Inflationary Gap)
Long Run Aggregate
Supply (Full Employment)
ASLR
P
AS
Equilibrium
Real Output
P
Price Level
AD
Q
Y f
Y 1

INCREASES IN AD:
DEMAND-PULL INFLATION
P
AS
AD1
AD2
P2
Price Level
P1
Q
Y1
Yf

DECREASES IN AS:
COST-PUSH INFLATION
AS2
P
AS1
P2
Price Level
P1
AD1
Q
Y1
Y 2

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

THE MONEY MARKET
Shift the Supply curve (always vertical) when FED changes the money supply to change nominalinterest rates!
Sm
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
NOMINAL interest rate, i
i
Dm
Quantity of Money

MONETARY POLICY AND EQUILIBRIUM GDP
Sm1
Sm2
Sm3
Investment
Demand Graph
Money Market
Graph
10
8
6
0
10
8
6
0
rate of interest, i
rate of interest, i
Dm
ID
Qty. of Money
Amount of investment, I
If the Money Supply
Increases to Stimulate
the Economy…
AS
Interest Rate Decreases
P3
Investment Increases
Price level
AD & GDP Increases
with slight inflation
P2
AD3(I=$25)
P1
Increasing money supply
continues the growth –
but, watch Price Level.
AD2(I=$20)
AD1(I=$15)
Real domestic output, GDP

LOANABLE FUNDS MARKET
S
This graph shows how the supply and demand for loanable funds affects real interest rates!
Real Interest Rate, r
r
D
Q
Quantity of Loanable Funds

Loanable Funds Market Graph(Long-Term Interest Rates)
What changes Supply:
Increase in Household savings
Increase in Gov’t savings
Increase in Business savings
Increase in Business savings
Increase in Foreigners’ savings
What changes Demand:
Increase in Household borrowing
Increase in business Investment
Increase in Foreign borrowing
Increase in Government borrowing (When the gov’t has a budget deficit!) = (the crowding -out effect)

THE FOREIGN EXCHANGE MARKET
The Market for Yen
P
Sy
Dollar Price of a Yen
Dy
0
Q
Qe
Quantity of Yen

THE FOREIGN EXCHANGE MARKET
The Market for Yen
P
Sy
3
2
1
Dollar
depreciates
Dollar price of a Yen
Dollar
appreciates
Dy
Q
Quantity of Yen

THE PHILLIPS CURVE CONCEPT
7
6
5
4
3
2
1
0
As inflation declines...
Annual rate of inflation
(percent)
unemployment
increases
And vice versa!
SRPC
1 2 3 4 5 6 7
Unemployment rate (percent)

THE PHILLIPS CURVE CONCEPT
LRPC = Is the natural
Rate of Unemployment
7
6
5
4
3
2
1
0
With Stagflation, Shift SRPC to the right
With AD shift, move along existing SRPC
Annual rate of inflation
(percent)
With AS shift, shift SRPC
SRPC 2
SRPC 1
1 2 3 4 5 6 7
Unemployment rate (percent)

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)

TWO WAYS TO SHOW ECONOMIC GROWTH
ASLR1
ASLR2
C
A
Price Level
Capital Goods
B
D
Q1
Q2
Consumer Goods
Real GDP

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

Circular Flow Model
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
GOVERNMENT
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ CONSUMPTION
$ REVENUE

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Graphs 2 Know For The AP Macro Economics Exam

by MrRed on May 12, 2010

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