8 MAIN GRAPHS TO KNOW AP MACROECONOMICS

AGGREGATE DEMAND CURVE Price level AD Real domestic output, GDP

CHANGES IN AGGREGATE DEMAND Can Increase Price level AD2 AD1 Real domestic output, GDP

CHANGES IN AGGREGATE DEMAND Can Increase …or Decrease Price level AD1 AD3 Real domestic output, GDP

AGGREGATE SUPPLY Long Run PL ASLR Y Price level Long-run Aggregate Full-Employment Yf Y Real domestic output, GDP

AGGREGATE SUPPLY Short Run PL AS Y Aggregate Supply Short-run Price level Full- Employment Y Yf Real domestic output, GDP

AGGREGATE SUPPLY Changes in Aggregate Supply PL Y Decrease In Price level Increase In Aggregate Supply Y Real domestic output, GDP

EQUILIBRIUM AND CHANGES IN EQUILIBRIUM PL AS Price Level Equilibrium Real Output 100 a b 92 AD Y 502 510 514 Real Domestic Output, GDP

DEMAND-PULL INFLATION INCREASES IN AD: DEMAND-PULL INFLATION PL AD1 AD2 AS PL2 Price Level PL1 Y Yf Y1 Y2 Real Domestic Output, GDP

DECREASES IN AD: RECESSION & CYCLICAL UNEMPLOYMENT b a PL1 Price Level c Y Y1 Yf Real Domestic Output, GDP

DECREASES IN AS: COST-PUSH INFLATION PL AS1 PL2 b Price Level PL1 a AD1 Y Y1 Yf Real Domestic Output, GDP

INCREASES IN AS: FULL EMPLOYMENT …With Price-Level Stability PL AS1 AS2 PL3 b PL2 PL1 a Price Level AD2 AD1 Y Y1 Y2 Y3 Real Domestic Output, GDP

GROWTH IN THE AD-AS MODEL ASLR1 ASLR2 C A Price Level Capital Goods B D Y1 Y2 Consumer Goods Real GDP

ECONOMIC GROWTH IN THE EXTENDED AD – AS MODEL ASLR1 ASLR2 AS2 AS1 Price Level PL2 PL1 AD2 AD1 o Y1 Y2 Real GDP

Rate of interest, i (percent) Amount of money demanded THE MONEY MARKET Sm 10 7.5 5 2.5 Suppose the money supply is decreased from $200 billion, Sm, to $150 billion Sm1. ie Rate of interest, i (percent) Dm 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)

Rate of interest, i (percent) Amount of money demanded THE MONEY MARKET Sm1 Sm 10 7.5 5 2.5 A temporary shortage of money will require the sale of some assets to meet the need. ie Rate of interest, i (percent) Dm 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)

Rate of interest, i (percent) Amount of money demanded THE MONEY MARKET Sm 10 7.5 5 2.5 Suppose the money supply is increased from $200 billion, Sm, to $250 billion Sm2. ie Rate of interest, i (percent) Dm 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)

Rate of interest, i (percent) Amount of money demanded THE MONEY MARKET Sm Sm2 10 7.5 5 2.5 A temporary surplus of money will require the purchase of some assets to meet the de- sired level of liquidity. ie Rate of interest, i (percent) Dm 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)

Interest Rate – Investment Relationship 16 14 12 10 8 6 4 2 INVESTMENT DEMAND CURVE and interest rate, i (percents) Expected rate of return, r, I D 5 10 15 20 25 30 35 40 Investment (billions of dollars)

Investment Demand

CIRCULAR FLOW DIAGRAM

Economic Growth PRODUCTION POSSIBILITIES CURVE Capital Goods b a B D Consumer Goods

The Market for Loanable Funds Interest Rate Supply Demand 5% $1,200 Loanable Funds (in billions of dollars) Copyright©2004 South-Western

An Increase in the Supply of Loanable Funds Interest Supply, S1 S2 Rate Demand 1. Tax incentives for saving increase the supply of loanable fund s . . . 5% $1,200 2. . . . which reduces the equilibrium interest rat e . . . 4% $1,600 Loanable Funds 3. . . . and raises the equilibrium quantity of loanable funds. (in billions of dollars) Copyright©2004 South-Western

An Increase in the Demand for Loanable Funds Interest Rate Supply D2 1. An investment tax credit increases the demand for loanable fund s . . . Demand, D1 6% $1,400 2. . . . which raises the equilibrium interest rate . . . 5% $1,200 Loanable Funds 3. . . . and raises the equilibrium quantity of loanable funds. (in billions of dollars) Copyright©2004 South-Western

The Effect of a Government Budget Deficit: Market for LF Interest S2 Supply, S1 Rate Demand 1. A budget deficit decreases the supply of loanable fund s . . . $800 6% 2. . . . which raises the equilibrium interest rat e . . . $1,200 5% Loanable Funds 3. . . . and reduces the equilibrium quantity of loanable funds. (in billions of dollars) Copyright©2004 South-Western

Foreign Exchange Market The Market for EUROS “Take my Euros! Dollar Price Per Euro (“How many Dollars does it Take to buy a Euro”) Supply of Euros Supply of Euros1 “A” “Now we Have more Euros! $/Euro* ($1.00) “B” $/Euro1 ($.50) FOREX Demand for Euros Qeuro* Qeuro1 Quantity of Euros If Europeans want to buy U.S. Goods/Services they must give up their Euros in order to obtain Dollars. Initially the SUPPLY of Euros is going to INCREASE in the Market for Euros.

Foreign Exchange Market The Market for EUROS “Take my Euros! Dollar Price Per Euro (“How many Dollars does it Take to buy a Euro”) Supply of Euros Supply of Euros1 “A” “Now we Have more Euros! $/Euro* ($1.00) “B” $/Euro1 ($.50) FOREX Demand for Euros Qeuro* Qeuro1 Quantity of Euros Notice that the Dollar Price Per Euro is now lower than it was at the previous equilibrium point. It NOW takes FEWER dollars to buy a Euro than it did before. The Dollar has APPRECIATED in value relative to the Euro

Foreign Exchange Market The Market for Dollars Euro Price Per Dollar (“How many Euros does it Take to buy a Dollar”) Supply of $ “B” Euro/$1 (€2.00) “A” Euro/$* (€.1.00) “Give me $$$” D$1 FOREX “Europeans are DEMANDING Dollars from us!” Demand for $ Q$* Q$1 Quantity of Dollars After the Europeans have given up their Euros, they are going to want (DEMAND) Dollars for those Euros. The DEMAND for the Dollar will INCREASE

Foreign Exchange Market The Market for Dollars Euro Price Per Dollar (“How many Euros does it Take to buy a Dollar”) Supply of $ “B” Euro/$1 (€2.00) “A” Euro/$* (€.1.00) D$1 “Europeans are DEMANDING Dollars from us!” Demand for $ Q$* Q$1 “Give me $$$” Quantity of Dollars Notice that the Euro Price Per Dollar is now higher than it was at the previous equilibrium point. It NOW takes more Euros to buy a dollar than it did before. The Euro has DEPRECIATED in value relative to the Dollar.

Annual rate of inflation Unemployment rate (percent) THE PHILLIPS CURVE CONCEPT 7 6 5 4 3 2 1 As inflation declines... unemployment increases Annual rate of inflation (percent) SRPC 1 2 3 4 5 6 7 Unemployment rate (percent)