Graphs 2 Know for the AP Macroeconomics Exam

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Graphs 2 Know for the AP Macroeconomics Exam

  1. 1. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
  2. 2. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010QQRobots(thousands)Pizzas (thousands)14131211109876543211 2 3 4 5 6 7 8ABCDEWAttainablebutInefficientUnattainableAttainable& EfficientPRODUCTION POSSIBILITIES
  3. 3. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Production Possibilities CurveShows:• Opportunity Cost: More pizzas means lessrobots• Unemployment / Inefficiency: Inside the curve• Efficiency: On the curve• Economic Growth: Curve shifts to the right
  4. 4. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010PriceLevelReal Domestic Output, GDPQP ASADAGGREGATE DEMAND / AGGREGATE SUPPLY:Long-run equilibriumEquilibriumReal OutputY fPLLRAS
  5. 5. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010PriceLevelReal Domestic Output, GDPQP ASADAS/AD: Recession(Recessionary Gap)EquilibriumReal OutputLRASLong Run AggregateSupply (Full Employment)Y 1PL 1Y f
  6. 6. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010PriceLevelReal Domestic Output, GDPQP ASADAS/AD: Inflation: Beyond Full Employment(Inflationary Gap)EquilibriumReal OutputLRASLong Run AggregateSupply (Full Employment)Y f Y 1PL 1
  7. 7. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010PriceLevelReal Domestic Output, GDPQP ASAD1INCREASES IN AD:DEMAND-PULL INFLATIONP2P1AD2Yf Y1
  8. 8. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010PriceLevelReal Domestic Output, GDPQP AS1AD1DECREASES IN AS:COST-PUSH INFLATIONP2Y 1Y 2AS2P1
  9. 9. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010AGGREGATE SUPPLY /AGGREGATE DEMANDSHOWS:• National Output: (Real GDP)• Employment and Unemployment• Price LevelAggregate Demand CurveDown Sloping Due To:• Real-Balances Effect• Interest-Rate Effect• Foreign Purchases Effect
  10. 10. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010NOMINALinterestrate,iQuantity of MoneyDmSmTHE MONEY MARKETShift the Supply curve(always vertical) when FEDchanges the money supply tochange nominal interestrates!i•If Nominal GDPIncreases, TransactionsDemand increases, and DmCurve Shifts to the right.•If Asset Demand for moneyincreases, Dm Curve shiftsto right
  11. 11. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Real domestic output, GDPDmInvestmentDemand Graphrateofinterest,i10860Qty. of Money Amount of investment, IMONETARY POLICY AND EQUILIBRIUM GDPSm1ASAD1(I=$15)P110860Sm2AD3(I=$25)P2If the Money SupplyIncreases to Stimulatethe Economy…Interest Rate DecreasesInvestment IncreasesAD & GDP Increaseswith slight inflationPricelevelAD2(I=$20)P3Sm3Increasing money supplycontinues the growth –but, watch Price Level.IDrateofinterest,iMoney MarketGraph
  12. 12. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010RealInterestRate,rQuantity of Loanable FundsLOANABLE FUNDS MARKETrD lfQS lfThis graph showshow the supply anddemand for loanablefunds affects realinterest rates!
  13. 13. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Loanable Funds Market Graph(Long-Term Interest Rates)What changes Supply:1. Increase inHousehold savings2. Increase in Gov’tsavings3. Increase in Businesssavings4. Increase in Businesssavings5. Increase inForeigners’ savingsWhat changes Demand:1.Increase in Householdborrowing2.Increase in businessInvestment3.Increase in Foreignborrowing4.Increase in Governmentborrowing (When thegov’t has a budgetdeficit!) = (the crowding-out effect)
  14. 14. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010The Market for YenQuantity of YenDollarPriceofaYen0PQQeSyDyTHE FOREIGN EXCHANGE MARKET
  15. 15. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010PQDySyDollarpriceofaYenQuantity of Yen321DollardepreciatesDollarappreciatesThe Market for YenTHE FOREIGN EXCHANGE MARKET
  16. 16. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Annualrateofinflation(percent)Unemployment rate (percent)765432101 2 3 4 5 6 7As inflation declines...THE PHILLIPS CURVE CONCEPTunemploymentincreasesAnd vice versa!SRPC
  17. 17. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Annualrateofinflation(percent)Unemployment rate (percent)765432101 2 3 4 5 6 7THE PHILLIPS CURVE CONCEPTSRPC 1LRPC = Is the naturalRate of UnemploymentSRPC 2With Stagflation, ShiftSRPC to the rightWith AD shift,move alongexisting SRPCWith AS shift,shift SRPC
  18. 18. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010Phillips Curve• Short run trade-off between inflation andunemployment.• In the Long Run there is no trade off. The longrun Phillips curve is Vertical!• Stagflation (an increase in Unemployment andinflation) or an Aggregate Supply Shock will shiftthe SRPC to the right.• Decreases in Inflation and Unemployment willshift the SRPC to the left. (and increase in ASwould cause this)
  19. 19. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010TWO WAYS TO SHOW ECONOMIC GROWTHABCDCapitalGoodsConsumer GoodsPriceLevelReal GDPASLR1 ASLR2Q1 Q2
  20. 20. “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 quantityof human resources3. New Technology leading to increasedproductivity4. Increase in quantity and quality of naturalresources5. Increase in size of the Labor Force.
  21. 21. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010BUSINESSES HOUSEHOLDSRESOURCESINPUTS$ COSTS $ INCOMESPRODUCTMARKETGOODS &SERVICESGOODS &SERVICES$ CONSUMPTION$ REVENUEGOVERNMENTRESOURCEMARKETCircular Flow ModelInjections:Investment,GovernmentSpending,ExportsLeakages:Savings,Taxes,Imports

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