Module 45
Putting it
All Together
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How to use macroeconomic models to
conduct policy analysis
• How to approach free-response
macroeconomics questions
A Structure for
Macroeconomic Analysis
1. A starting point
2. A pivotal event
3. Initial effects of the event
4. Secondary and long-run
effects of the event
Assume that the United States
economy is in a long-run
equilibrium.
(a) Draw a correctly labeled
long run graph of aggregate
demand and aggregate
supply and show each of
the following for the United
States.
The current equilibrium
output level, labeled
Ye, and the current
equilibrium price
level, labeled PLe.
A Structure for
Macroeconomic Analysis
1. A starting point
2. A pivotal event
3. Initial effects of the event
4. Secondary and long-run
effects of the event
(b) Suppose that
consumer confidence in
the United States
experiences a significant
downturn. In the graph
drawn in part (a), show the
impact of weakened
consumer confidence. In
the graph, show any
changes to the equilibrium
price level and the
equilibrium output level.
A Structure for
Macroeconomic Analysis
1. A starting point
2. A pivotal event
3. Initial effects of the event
4. Secondary and long-run
effects of the event
(c) Assume that the central
bank of the United States is
prepared to take action to
reverse the economic
impacts shown in part (b).
(i) Should the central bank
buy or sell bonds in an open
market operation?
(ii) How does the central
bank’s action in part (c)(i)
affect the nominal interest
rate? Explain.
A Structure for
Macroeconomic Analysis
1. A starting point
2. A pivotal event
3. Initial effects of the event
4. Secondary and long-run
effects of the event
(d)
The United
States and Mexico are
major trading partners.
How would the weak
consumer confidence in
the United States affect
the balance of
payments current
account with Mexico?
Explain.
A Structure for
Macroeconomic Analysis
1. A starting point
2. A pivotal event
3. Initial effects of the event
4. Secondary and long-run
effects of the event
(e) Consider the foreign
exchange market for the
United States dollar. Based
only upon your response to
part (d), how are each of the
following affected?
(i) The supply of the
United States dollar relative
to the Mexican peso.
(ii) The value of the
dollar relative to the peso.
The Starting Point
•AD/AS Model
• Long-run macroeconomic equilibrium
• A recessionary gap
• An inflationary gap
The Pivotal Event
•Recession
•Inflation
•Expectations
change
•Wealth change
•Supply shocks
Table 45.1 Major Factors that Shift Curves in Each Model
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
The Initial Effect of the Event
•The effects of a curve shifting
Secondary and Long-Run Effects
of the Event
•Secondary Effects
• Changes in the price level or real interest rate
result in changes in some or all of the following:
• International Capital Flows
• Net Exports
• Investment
Secondary and Long-Run Effects
of the Event
•Long-run Effects
• Government budget
• "Crowding Out"
• Capital formation
• Economic growth
Figure 45.1 (a) Analysis Starting Points
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 45.1 (b) Analysis Starting Points
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Figure 45.1 (c) Analysis Starting Points
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Unnumbered Figure 45.1
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Unnumbered Figure 45.2
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Unnumbered Figure 45.3
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers
Unnumbered Figure 45.4
Ray and Anderson: Krugman’s Macroeconomics for AP, First Edition
Copyright © 2011 by Worth Publishers