“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
PRODUCTION POSSIBILITIES
Robots (thousands)
Q 14
13
12
11
10
9
8
7
6
5
4
3
2
1
Unattainable
A
B
C
W
Attainable
& Efficient
D
Attainable
but
Inefficient
E
1
2
3
4
5
6
7
Pizzas (thousands)
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
8
Q
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
AGGREGATE DEMAND / AGGREGATE SUPPLY
Price Level
P
AS
Equilibrium
Real Output
P
AD
Y
Real Domestic Output, GDP
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
AS/AD: Recession
Long Run Aggregate
Supply (Full Employment)
ASLR
Price Level
P
AS
Equilibrium
Real Output
P
AD
Y
Real Domestic Output, GDP
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
AS/AD: Inflation: Beyond Full Employment
Long Run Aggregate
Supply (Full Employment)
ASLR
AS
Equilibrium
Real Output
Price Level
P
P
AD
Y f
Y 1
Real Domestic Output, GDP
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
INCREASES IN AD:
DEMAND-PULL INFLATION
Price Level
P
AD1
AD2
AS
P2
P1
Yf
Y1
Real Domestic Output, GDP
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
DECREASES IN AS:
COST-PUSH INFLATION
AS2
Price Level
P
AS1
P2
P1
AD1
Y2
Y1
Real Domestic Output, GDP
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
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
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
THE MONEY MARKET
Shift the Supply curve
(always vertical) when FED
changes the money supply to
change nominal interest
rates!
NOMINAL interest rate, i
Sm
•If Nominal GDP Increases,
Transactions Demand
increases, and Dm Curve
Shifts to the right.
i
•If Asset Demand for money
increases, Dm Curve shifts
to right
Dm
Quantity of Money
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
MONETARY POLICY AND EQUILIBRIUM GDP
Sm1 Sm2
Sm3
Investment
Demand Graph
Money Market
rate of interest, i
rate of interest, i
Graph
10
8
6
Dm
0
10
8
6
0
Qty. of Money
Amount of investment, I
Price level
AS
P3
P2
P1
AD3(I=$25)
AD2(I=$20)
AD1(I=$15)
Real domestic output, GDP
ID
If the Money Supply
Increases to Stimulate
the Economy…
Interest Rate Decreases
Investment Increases
AD & GDP Increases
with slight inflation
Increasing money supply
continues the growth –
but, watch Price Level.
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
LOANABLE FUNDS MARKET
Real Interest Rate, r
S
This graph shows
how the supply and
demand for loanable
funds affects real
interest rates!
r
D
Q
Quantity of Loanable Funds
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
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)
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
THE FOREIGN EXCHANGE MARKET
The Market for Yen
P
Dollar Price of 1 Yen
Sy
Dy
0
Qe
Quantity of Yen
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
THE FOREIGN EXCHANGE MARKET
The Market for Yen
Dollar price of one Yen
P
Sy
3
2
Dollar
depreciates
Dollar
appreciates
1
Dy
Quantity of Yen
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
Q
THE PHILLIPS CURVE CONCEPT
Annual rate of inflation
(percent)
7
As inflation declines...
6
5
4
unemployment
increases
3
And vice versa!
2
1
0
SRPC
1
2
3
4
5
6
7
Unemployment rate (percent)
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
THE PHILLIPS CURVE CONCEPT
LRPC = Is the natural
Rate of Unemployment
Annual rate of inflation
(percent)
7
6
With Stagflation, Shift
SRPC to the right
5
With AD shift,
move along
existing SRPC
4
3
2
1
SRPC 2
0
SRPC 1
1
2
3
4
5
6
7
Unemployment rate (percent)
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
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
TWO WAYS TO SHOW ECONOMIC GROWTH
ASLR1 ASLR2
C
Price Level
Capital Goods
A
B
Consumer Goods
D
Q1 Q2
Real GDP
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005
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
Circular Flow Model
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
“Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2005