1.
The difference between a change
in demand and a change in
quantity demanded

2.
GRAPHING DEMAND
Price of Corn
P
$5
CORN
P QD What if
4
$5 10
4 20
Demand
3
3 35 Increases?
2 55 2
1 80
1
D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn

3.
GRAPHING DEMAND
Price of Corn
P Increase
$5
CORN
P QD in Quantity
4
$5 30
10 Demanded
4 40
20 3
3 60
35
2 55 2 Increase
80
1 80+ in D’
1
Demand D
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn

4.
The difference between a change
in supply and a change in
quantity demanded

5.
GRAPHING SUPPLY
Price of Corn
P
$5 S CORN
P QS
4 What if $5 60
3
Supply 4 50
3 35
2
Increases? 2 20
1 5
1
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn

6.
GRAPHING SUPPLY
Price of Corn
P Increase S’
$5 S CORN
in P QS
4
Supply $5 6080
3 4 5070
3 3560
2
Increase 2 2045
1 5 30
1 in Quantity
Supplied
o 10 20 30 40 50 60 70 80 Q
Quantity of Corn

7.
Mislabeling or NOT labeling
graphs correctly

8.
EQUILIBRIUM AND CHANGES
IN EQUILIBRIUM
LRAS
P AS
Price Level
Equilibrium
P Real Output
AD
Y Q
Real Domestic Output, GDP

9.
GROWTH IN THE AD-AS MODEL
C ASLR1 ASLR2
A
Capital Goods
Price Level
B D Q1 Q2
Consumer Goods Real GDP

10.
THE MONEY MARKET
Sm1 Sm Use this graph when the
10 FED changes the money
Nominal Interest Rate
supply to change interest
7.5 rates.
5 ie
2.5 Dm
0
0 50 100 150 200 250 300
Amount of money demanded
(billions of dollars)

11.
Net effects of Monetary
Policy and/or Fiscal Policy on
Interest Rate

12.
Expansionary Fiscal Policy
= Interest Rate INCREASE
• Exp. Fiscal Policy (Gov’t deficit) 
Increase Demand for Money  Increase
Interest Rate.
• Higher Price Level Increase Demand for
Money Increase Interest Rate.

13.
Expansionary Monetary Policy
 Interest Rate DECREASE

14.
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1 S
m2
Nominal interest rate Investment
10 10 Demand
8 8
6 6
Dm
0 0
Quantity of money Amount of investment, I
AS
Money Supply Increases
If the money
Price level
Interest Rate Decreases
supply increases
Investment Increases
to stimulate the
P2
P1 economy...
AD & GDP Increases
AD1 AD2
with slight inflation
Real domestic output, GDP

15.
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1 S S
m2 m3
Real rate of interest, i Investment
10 10 Demand
8 8
6 6
Dm
0 0
Quantity of money demanded and supplied Amount of investment, i
AS
More Money Supply
P3 If the money
Price level
Lower Interest Rates
supply increases
More Investment
P2 again…
P1 Still higher AD & GDP
AD1 AD2 AD3
with significant inflation
Real domestic output, GDP

16.
MULTIPLIER(S) CONFUSION

17.
THE MULTIPLIER EFFECT
1 1
Multiplier = MPS
or
1 - MPC
Change in initial change
GDP = Multiplier x in spending
MPC and the Multiplier
MPC Multiplier
.9 10
.8 5
.75 4
.67 3
.5 2

18.
MONEY MULTIPLIER
• 1 / Required Reserve Ratio
• Maximum Multiple $$$ Money Expansion

19.
MULTIPLE DEPOSIT EXPANSION PROCESS
Amount bank
Acquired reserves Required Excess can lend - New
Bank and deposits reserves reserves money created
A $100.00 $20.00 $80.00 $80.00
B 80.00 16.00 64.00 64.00
C 64.00 12.80 51.20 51.20
D 51.20 10.24 40.96 40.96
E 40.96 8.19 32.77 32.77
F 32.77 6.55 26.22 26.22
G 26.22 5.24 20.98 20.98
H 20.98 4.20 16.78 16.78
I 16.78 3.36 13.42 13.42
J 13.42 2.68 10.74 10.74
K 10.74 2.15 8.59 8.59
L 8.59 1.72 6.87 6.87
M 6.87 1.37 5.50 5.50
N 5.50 1.10 4.40 4.40
Other banks 21.97 4.40 17.57 17.57
Total amount of money created by the banking system $400.00

20.
Balanced Budget
Multiplier= 1
(Net Result on GDP)

21.
FEDERAL RESERVE PURCHASE
OF BONDS FROM PUBLIC
New reserves $200
Purchase of a $800 Required
$1000 bond Excess
Reserves reserves
from public...
$1000
$4000 Initial
Bank System Lending Deposit
Total Increase in Money Supply ($5000)

22.
Someone deposits $1000 in new
Reserves at a bank.
New reserves $200
$800 Required
Excess
Reserves reserves
$1000
$4000 Initial
Bank System Lending Deposit
Total Increase in Money Supply ($4000)

23.
Fed Buys A $1,000 Bond From Joe’s Bank
New reserves
$1,000
20% RR Excess
Reserves
$5,000
PMC thru Bank Lending
TMS is $5000

24.
OUTCOME OF MONEY EXPANSION
$100
New reserves $20
$80 Required
Leakages
Excess reserves
reserves
exist...(Savings)
Currency Drains $100
$400
Initial
Excess Reserves Deposit
Bank system lending
Money Created

25.
$100
Injections:
New reserves $20
$80 Required
Excess reserves
reserves
Additional Spending into
Income – Expenditures stream:
Investment,
G, or Xn
$400 $100
Initial
Bank system lending Deposit
Money Created

26.
UNEMPLOYMENT
Types of Unemployment
Frictional Unemployment
Structural Unemployment
Cyclical Unemployment
Natural rate of Unemployment =
Structural + Frictional (Around 4-5%)

27.
LOANABLE FUNDS MARKET
S
This graph shows
how the supply and
demand for loanable
real interest rate
funds affects real
interest rates
r
D
Q
Quantity of Loanable Funds

28.
Loanable Funds Market Graph
(Long-Term Interest Rates)
What changes Supply: What changes Demand:
1. Increase in Household 1. Increase in Household
savings borrowing
2. Increase in Gov’t 2. Increase in business
savings Investment
3. Increase in Foreign
3. Increase in Business
borrowing
savings
4. Increase in Government
4. Increase in Business borrowing (When the
savings gov’t has a budget
5. Increase in Foreigners’ deficit!) = (the crowding -
savings out effect)

29.
Price Index
Price Index Price of market basket in specific year
in a given = --------------------------------------------- X 100
Year Price of same market basket in base year
Nominal GDP
Real GDP = ------------------------------- X 100
Price Index

30.
Remembering the difference
between
Real
and
Nominal

31.
Nominal:
with Inflation
Real:
Adjusted for Inflation

32.
Nominal vs. Real
6%
11% = +
Inflation
Premium
5%
Nominal Real
Interest Interest
Rate Rate

33.
Real Interest Rate
[Nominal I.R. – inflation rate = Real I.R.]
16%
10
- 6 = %
%
Nominal Inflation Real
Interest Premium Interest
Rate
Rate

34.
Demand-Pull Inflation
vs.
Cost-Push Inflation

35.
DEMAND-PULL INFLATION
ASLR AS2
AS1
Price Level
P3 c
P2 b
P1 a
AD2
AD1
o Q1
Real domestic output

36.
COST-PUSH INFLATION
Occurs when short-run AS shifts left
ASLR AS2
AS1
Price Level
P2 b
P1 a
AD1
o Q2 Q1
Real domestic output

37.
COST-PUSH INFLATION
Government response with increased AD
ASLR AS2
AS1
Even
Price Level
P3 c higher
P2 b price
P1 a levels
AD2
AD1
o Q2 Q1
Real domestic output

38.
COST-PUSH INFLATION
ASLR AS2
AS1
Price Level
P2 b
P1 a
AD1
o Q2 Q1
Real domestic output

39.
COST-PUSH INFLATION
If government allows a recession to occur
ASLR AS2
AS1
Nominal
Price Level
wages fall (which
increases AS &
P2 b AS returns
P1 a to its original
location
AD1
o Q2 Q1
Real domestic output

40.
People must believe Fed is serious
about stopping inflation. Higher
expectations decreases Aggregate
Supply.

41.
THE PHILLIPS CURVE CONCEPT
Annual rate of inflation 7
6 As inflation declines...
(percent)
5
Unemployment
4 increases
3
2
1
0
1 2 3 4 5 6 7
Unemployment rate (percent)

42.
THE PHILLIPS CURVE CONCEPT
Annual rate of inflation 7 LRPC = Natural Rate of
Unemployment
6
(percent)
5
4
3
2
1
0
1 2 3 4 5 6 7
Unemployment rate (percent)

43.
GENERAL EXAM ADVICE
Free Response:
• Do not restate question
• Use correct terminology
• Even if a graph is not required, draw
one anyway and explain.
• Use same outline as question
• Use Good Handwriting

44.
GENERAL EXAM ADVICE
• Draw graphs large enough for the
reader to tell what’s going on.
• Explain your reasoning: “the price
increased”, why?
• No Calculators