Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient Robots (thousands) D Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

Pizzas (hundred thousands) PRODUCTION POSSIBILITIES Q A’ 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Economic Growth B’ C’ Robots (thousands) D’ E’ Q 1 2 3 4 5 6 7 8 Pizzas (hundred thousands)

PRODUCTION POSSIBILITIES Curve For Each Country United States Brazil Coffee (tons) 45 40 35 30 25 20 15 10 5 5 10 15 20 25 30 5 10 15 20 Wheat (tons) A B

TRADING POSSIBILITIES LINES The Gains from Trade United States Brazil 45 40 35 30 25 20 15 10 5 Trading possibilities line 30 25 20 15 10 5 Coffee (tons) Coffee (tons) Trading possibilities line A’ A B’ B 5 10 15 20 25 30 5 10 15 20 Wheat (tons) Wheat (tons)

MARKET DEMAND & SUPPLY P S D o Q Market Clearing Equilibrium 7 Price of Corn P S $5 4 3 2 1 Market Clearing Equilibrium D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

MARKET DEMAND & SUPPLY Shortage P S D o Q At a $2 price more is being Price of Corn P S $5 4 3 2 1 At a $2 price more is being demanded than supplied Shortage D 7 11 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

MARKET DEMAND & SUPPLY Surplus P S D o Q At a $4 price more is being Price of Corn P Surplus S $5 4 3 2 1 At a $4 price more is being supplied than demanded D 7 o 2 4 6 8 10 12 14 16 Q Quantity of Corn

THE MARKET FOR CURRENCY Dollar appreciates / Pound depreciates £1 : $1 £2 : $1 £ / $ 2 / 1 = 2 Dollar depreciates / appreciates £1 : $2 £.5 : $1 1 / 2 = .5 .5/ 1 = .5 P S EXCHANGE RATE: £1 = $1 2 1 .5 Dollar appreciates Price of Dollar in Pound (£ / $) Dollar depreciates D Q Quantity of Dollar

Demand for Loanable Funds Supply of Loabable Funds Loanable Funds Market i Slf Demand for Loanable Funds Businesses Government Supply of Loabable Funds Households 3 2 1 Real interest rate Dlf Qlf Quantity of loanable funds

Bond Market Pb Sb Price of Bonds Db Qb Quantity of bonds 3 2 1 Demand for Bonds Households Supply of Bonds Businesses Government 3 2 1 Price of Bonds Db Qb Quantity of bonds

Rate of interest, i (percent) Amount of money demanded THE MONEY MARKET A temporary surplus of money will require the purchase of some assets to meet the de- sired level of liquidity. Sm1 Sm Sm2 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)

Average and Marginal Propensities APC Consumption / Disposable Income APS Saving / Disposable Income MPC Change in Consumption Change in Disposable Income MPS Change in Saving Change in Disposable Income

and interest rate, i (percents) Expected rate of return, r, INVESTMENT 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)

Inverse relationship between THE MULTIPLIER EFFECT Multiplier = or 1 MPS 1 - MPC Inverse relationship between Multiplier & MPS Change in GDP = Multiplier x initial change in spending

AGGREGATE DEMAND Price level Aggregate Demand Increases AD2 Decreases AD1 AD3 Real domestic output, GDP

Change in Consumer Spending DETERMINANTS OF AGGREGATE DEMAND Change in Consumer Spending Consumer Wealth Consumer Expectations Consumer Indebtedness Taxes Change in Investment Spending Real Interest Rates Expected Returns Expected Future Business Conditions Technology Degree of Excess Capacity Business Taxes

Government Spending Net Export Spending National Income Abroad DETERMINANTS OF AGGREGATE DEMAND Government Spending Net Export Spending National Income Abroad Exchange Rates Changes in Aggregate Demand Shifts and the Aggregate Expenditures Model Illustrated…

Decrease In Aggregate Supply Increase In Aggregate Supply Price level Increase In Aggregate Supply Real domestic output, GDP

Domestic Resource Availability Land Labor Capital DETERMINANTS OF AGGREGATE SUPPLY Change in Input Prices Domestic Resource Availability Land Labor Capital Entrepreneurial Ability Prices of Imported Goods Market Power

Change in Productivity DETERMINANTS OF AGGREGATE SUPPLY Change in Productivity Productivity = Real Output Input Change in Legal-Institutional Environment Business Taxes and Subsidies Government Regulation

Equilibrium output short of full employment LRAS AS Price Level PLe AD ye Yfe Real Domestic Output, GDP

SHORT-RUN AGGREGATE SUPPLY SRAS Price Level P2 a2 A higher price level increases profits and output moving the economy from a1 to a2 P1 A lower price level decreases profits and output moving the economy from a1 to a3 a1 P3 a3 o Q3 Q1 Q2 Real domestic output

LONG RUN AGGREGATE SUPPLY A higher price level results in higher nominal wages and thus shifts the short-run aggregate supply to the left ASLR AS2 Price Level b1 AS1 Short Run - P2 a2 Period in which nominal wages (and other input prices) remain fixed as the price level increases or decreases AS3 a1 A lower price level results in lower nominal wages and shifts the short-run aggregate supply to the right P1 Long Run - P3 Period in which nominal wages are fully responsive to previous changes in the price level a3 c1 o Q3 Q1 Q2 Real domestic output

Equilibrium output at full employment LRAS SRAS Price Level PL1 a AD o YFE Real domestic output

+ = THE DEMAND FOR MONEY Transactions Demand, Dt Asset Demand, Da Total demand for money, Dm Nominal interest rate , i (percent) Amount of money demanded (billions of dollars) Dt 10 7.5 5 2.5 0 50 100 150 200 250 300 Nominal interest rate, i (percent) Amount of money demanded (billions of dollars) 10 7.5 5 2.5 Da Nominal interest rate, i (percent) Amount of money demanded (billions of dollars) 0 50 100 150 200 250 300 10 7.5 5 2.5 Dm 0 50 100 150 200 250 300

Nominal interest rate , i (percent) Amount of money demanded THE MONEY MARKET Sm 10 7.5 5 2.5 ie Nominal interest rate , i (percent) Dm 0 50 100 150 200 250 300 Amount of money demanded (billions of dollars)

Annual rate of inflation (percent) Unemployment rate (percent) THE PHILLIPS CURVE PCLR 7 6 5 4 3 2 1 There is no significant trade off between inflation and unemployment over the long run (PCLR) Normally, there is a trade off between the rate of inflation and the rate of unemployment (PC) Annual rate of inflation (percent) Aggregate supply shocks can cause both higher rates of inflation and higher rates of unemployment (shift from PC to PC1) PC1 PC 1 2 3 4 5 6 7 Unemployment rate (percent)

THE LAFFER CURVE Maximum Tax Revenue Tax rate (percent) 100 n Tax rate (percent) m m Maximum Tax Revenue l Tax revenue (dollars)