Graphs 2 Know for the AP Macroeconomics Exam
- 1. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010
- 2. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 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. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 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
- 4. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 PriceLevel Real Domestic Output, GDP Q P AS AD AGGREGATE DEMAND / AGGREGATE SUPPLY: Long-run equilibrium Equilibrium Real Output Y f PL LRAS
- 5. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 PriceLevel Real Domestic Output, GDP Q P AS AD AS/AD: Recession (Recessionary Gap) Equilibrium Real Output LRAS Long Run Aggregate Supply (Full Employment) Y 1 PL 1 Y f
- 6. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 PriceLevel Real Domestic Output, GDP Q P AS AD AS/AD: Inflation: Beyond Full Employment (Inflationary Gap) Equilibrium Real Output LRAS Long Run Aggregate Supply (Full Employment) Y f Y 1 PL 1
- 7. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 PriceLevel Real Domestic Output, GDP Q P ASAD1 INCREASES IN AD: DEMAND-PULL INFLATION P2 P1 AD2 Yf Y1
- 8. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 PriceLevel Real Domestic Output, GDP Q P AS1 AD1 DECREASES IN AS: COST-PUSH INFLATION P2 Y 1Y 2 AS2 P1
- 9. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 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
- 10. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 NOMINALinterestrate,i Quantity of Money Dm Sm 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 2010 Real domestic output, GDP Dm Investment Demand Graph rateofinterest,i 10 8 6 0 Qty. of Money Amount of investment, I MONETARY POLICY AND EQUILIBRIUM GDP Sm1 AS AD1(I=$15) P1 10 8 6 0 Sm2 AD3(I=$25) P2 If the Money Supply Increases to Stimulate the Economy… Interest Rate Decreases Investment Increases AD & GDP Increases with slight inflation Pricelevel AD2(I=$20) P3 Sm3 Increasing money supply continues the growth – but, watch Price Level. ID rateofinterest,i Money Market Graph
- 12. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 RealInterestRate,r Quantity of Loanable Funds LOANABLE FUNDS MARKET r D lf Q S lf This graph shows how the supply and demand for loanable funds affects real interest rates!
- 13. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 Loanable Funds Market Graph (Long-Term Interest Rates) What changes Supply: 1. Increase in Household savings 2. Increase in Gov’t savings 3. Increase in Business savings 4. Increase in Business savings 5. Increase in Foreigners’ savings What changes Demand: 1.Increase in Household borrowing 2.Increase in business Investment 3.Increase in Foreign borrowing 4.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 2010 The Market for Yen Quantity of Yen DollarPriceofaYen 0 P QQe Sy Dy THE FOREIGN EXCHANGE MARKET
- 15. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 P Q Dy Sy DollarpriceofaYen 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 2010 Annualrateofinflation (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 2010 Annualrateofinflation (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 With AS shift, shift SRPC
- 18. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 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)
- 19. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 TWO WAYS TO SHOW ECONOMIC GROWTH A B C D CapitalGoods Consumer Goods PriceLevel Real GDP ASLR1 ASLR2 Q1 Q2
- 20. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 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 5. Increase in size of the Labor Force.
- 21. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 BUSINESSES HOUSEHOLDS RESOURCES INPUTS $ COSTS $ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT RESOURCE MARKET Circular Flow Model Injections: Investment, Government Spending, Exports Leakages: Savings, Taxes, Imports