Models in
AP Economics
Sally Meek
Sally.meek@pisd.edu
Models in
AP Macroeconomics
Let’s focus on models
Directions for FRQ’s include: …….
… it is not enough to list the results of your
analysis. Include correctly labeled diagrams, if
useful or required, in explaining your
answers.
A correctly labeled diagram must have all
axes and curves clearly labeled and must show
directional changes. Use a pen with black or dark
blue ink.

Production Possibilities Frontier
(opportunity cost, economic growth, trade)

Circular Flow Model
(National Income Accounting)

Market Supply and Demand
(foreign exchange markets)
Macroeconomics
Key Graphs
•Aggregate Supply and Demand,
Including LRAS
(monetary policy, fiscal policy, market self
regulation)
•Investment demand
•Money Market
(monetary policy)
Macroeconomics
Key Graphs

Loanable funds market
(fiscal policy)

Phillips Curve – short run and long run
Macroeconomics
Key Graphs
Increasing opportunity costs
Good X
Constant opportunity costs
Good X
Good Y
Good Y
Production Possibility Frontier
Radios
Radios
3
2
12
Wheat
4
Wheat
Using PPFs and comparative
advantage
Assume they trade
1 r for 3 w
Radios 4
Radios
3
2
12
Wheat
4
6
Wheat
Using PPFs and CPFs
Product Market
Consumption expenditures
Goods and services
Net taxes
Net taxes
Government
Households
Public goods and services
Firms
Public goods and services
Land, labor, capital. entrepreneurial ability
Rent, wages, interest, profits
Resource Market
Circular Flow Model
P
S
P1
D
Q1
Q
Perfectly Competitive Market
Demand
Supply
Changes in:
Changes in:
•Taste and preference
•Income
•Marketsize (# of buyers)
•Consumer expectations
•Price of related goods
complements or substitutes
•Resource prices
•Technology
•Number of sellers
•Producer expectations
•Taxes and subsidies
•Price of alternative goods
Non-price determinants
S$
Yen/$
$/Yen
SYen
D$1
SYen1
D$
DYen
USD
Yen
Currency Markets
Supply and Demand

Changes in any of the following:
◦
◦
◦
◦
◦
Relative real interest rates
Relative price levels
Relative national income
Taste for imports
Speculation
Determinants of Exchange Rates
LRAS
PL
SRAS
PL1
AD=C+Ig+G+Xn
Yf
RGDP
Aggregate Supply and Demand

LRAS – changes in technology,
productivity, and the quantity or quality of
land, labor, capital

SRAS – changes in input costs and
inflation expectations

AD – changes in personal consumption
spending, gross private domestic
investment, government purchases and
net exports
Determinants
RIR
(As
compared
to the
expected
rate of
return)
•As RIR changes the quantity of
Investment demanded changes
•Other determinants shift the ID curve:
• costs of capital
•business taxes
•Technology
ID
•expectations
Q
Investment Demand
MS
NIR
•MS – affected by actions of the
Federal Reserve
i1
MD
Q1
•MD –
•Transaction demand
determined by GDP
•Asset demand
determined by NIR
Q
Money Market
RIR
S LF
r1
D LF
Q1
•Supply of Loanable Funds:
personal savings and
financial capital from
abroad
•Demand for Loanable Funds:
firms demand for funds for
capital and interest
sensitive consumption
Q
Loanable Funds Market
Inflation
rate
LRPC
4%
2%
SRPC (assumes 4 % expected inflation at each UR)
SRPC (assumes 2% expected inflation at each UR)
Natural rate
of
unemployment
Unemployment
rate
Phillips Curve – LR and SR