This document contains a review of key graphs and concepts for the AP Macroeconomics exam, including: 1) Production Possibilities Curve showing opportunity cost and economic growth. 2) Aggregate Demand/Aggregate Supply model showing equilibrium, recession, and inflation. 3) Money Market graph showing how interest rates are determined. 4) Phillips Curve showing the relationship between inflation and unemployment. 5) Circular Flow model showing the flows of payments between businesses, households, and government.

1. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 GRAPHS 2 KNOW FOR THE AP MACRO EXAMINATION Mr. Redelsheimer AP Macroeconomics 2007-2008

2. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 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. Production Possibilities Curve Shows : Opportunity Cost : More pizzas means less robots Unempolyment / Inefficiency : Inside the curve Efficiency : On the curve Economic Growth : Curve shifts to the right “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005

4. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 Price Level Real Domestic Output, GDP Q P AS AD AGGREGATE DEMAND / AGGREGATE SUPPLY Equilibrium Real Output Y P

5. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 Price Level Real Domestic Output, GDP Q P AS AD AS/AD: Recession Equilibrium Real Output AS LR Long Run Aggregate Supply (Full Employment) Y P

6. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 Price Level Real Domestic Output, GDP Q P AS AD AS/AD: Inflation: Beyond Full Employment Equilibrium Real Output AS LR Long Run Aggregate Supply (Full Employment) Y f Y 1 P

7. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 Price Level Real Domestic Output, GDP Q P AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P 2 P 1 AD 2 Yf Y1

8. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 Price Level Real Domestic Output, GDP Q P AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P 2 Y 1 Y 2 AS 2 P 1

9. AGGREGATE SUPPLY / AGGREGATE DEMAND SHOWS: National Output: (Real GDP) Employment and Unemployment Price Level “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 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 2005 NOMINAL interest rate, i Quantity of Money D m S m 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 2005 Real domestic output, GDP D m Investment Demand Graph rate of interest, i 10 8 6 0 Qty. of Money Amount of investment, I MONETARY POLICY AND EQUILIBRIUM GDP S m1 AS AD 1 (I=$15) P 1 10 8 6 0 S m2 AD 3 (I=$25) P 2 If the Money Supply Increases to Stimulate the Economy… Interest Rate Decreases Investment Increases AD & GDP Increases with slight inflation Price level AD 2 (I=$20) P 3 S m3 Increasing money supply continues the growth – but, watch Price Level. ID rate of interest, i Money Market Graph

12. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 Real Interest Rate, r Quantity of Loanable Funds LOANABLE FUNDS MARKET r D Q S This graph shows how the supply and demand for loanable funds affects real interest rates!

13. 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 “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 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)

14. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 The Market for Yen Quantity of Yen Dollar Price of 1 Yen 0 P Q Q e S y D y THE FOREIGN EXCHANGE MARKET

15. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 P Q Dy Sy Dollar price of one Yen 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 2005 Annual rate of inflation (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 2005 Annual rate of inflation (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

18. 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) “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005

19. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 TWO WAYS TO SHOW ECONOMIC GROWTH A B C D Capital Goods Consumer Goods Price Level Real GDP AS LR1 AS LR2 Q 1 Q 2

20. 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 “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005

21. “ Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005 BUSINESSES HOUSEHOLDS RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION $ REVENUE GOVERNMENT RESOURCE MARKET Circular Flow Model