Robots (thousands) Pizzas (thousands) A B C D E W Attainable but Inefficient Unattainable Attainable & Efficient PRODUCTION POSSIBILITIES

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

Price Level Real Domestic Output, GDP AS AD AGGREGATE DEMAND / AGGREGATE SUPPLY Equilibrium Real Output Y P

Price Level Real Domestic Output, GDP Yfe AS AD AS/AD: Recession Equilibrium Real Output AS LR Long Run Aggregate Supply (Full Employment) Y P

Price Level Real Domestic Output, GDP AS AD AS/AD: Inflation: Beyond Full Employment Equilibrium Real Output AS LR Long Run Aggregate Supply (Full Employment) Y f Y 1 P

Price Level Real Domestic Output, GDP AS AD 1 INCREASES IN AD: DEMAND-PULL INFLATION P2P2 P1P1 AD 2 Y* Y1

Price Level Real Domestic Output, GDP AS 1 AD 1 DECREASES IN AS: COST-PUSH INFLATION P2P2 Y 1Y 1 Y 2 AS 2 P1P1

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

NOMINAL interest rate, i Quantity of Money DmDm SmSm THE MONEY MARKET Shift the Supply curve (always vertical) when FED changes the money supply to change nominal interest rates! i If Nominal GDP Increases, Transactions Demand increases, and Dm Curve Shifts to the right. If Asset Demand for money increases, Dm Curve shifts to right

Real domestic output, GDP DmDm Investment Demand Graph rate of interest, i Qty. of Money Amount of investment, I MONETARY POLICY AND EQUILIBRIUM GDP S m1 AS AD 1 (I=$15) P1P S m2 AD 3 (I=$25) P2P2 If the Money Supply Increases to Stimulate the Economy…  Interest Rate Decreases  Investment Increases  AD & GDP Increases with slight inflation Price level AD 2 (I=$20) P3P3 S m3  Increasing money supply continues the growth – but, watch Price Level. ID rate of interest, i Money Market Graph

Real Interest Rate, r Quantity of Loanable Funds LOANABLE FUNDS MARKET r D Q S This graph shows how the supply and demand for loanable funds affects real interest rates!

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 FINANCIAL investments 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)

The Market for Yen Quantity of Yen Yen/Dollar 0 e* QeQe SySy DyDy THE FOREIGN EXCHANGE MARKET

Dy Sy Yen/Dollar Quantity of Yen Dollar depreciates Dollar appreciates The Market for Yen THE FOREIGN EXCHANGE MARKET

Annual rate of inflation (percent) Unemployment rate (percent) As inflation declines... THE PHILLIPS CURVE CONCEPT unemployment increases And vice versa! SRPC

Annual rate of inflation (percent) Unemployment rate (percent) THE PHILLIPS CURVE CONCEPT SRPC 1 LRPC = Is the natural Rate of Unemployment SRPC 2 With Stagflation, Shift SRPC to the right With AD shift, move along existing SRPC

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)

TWO WAYS TO SHOW ECONOMIC GROWTH A B C D Capital Goods Consumer Goods Price Level Real GDP AS LR1 AS LR2 Q1Q1 Q2Q2

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

BUSINESSES HOUSEHOLDS RESOURCES INPUTS $ COSTS$ INCOMES PRODUCT MARKET GOODS & SERVICES GOODS & SERVICES $ CONSUMPTION$ REVENUE GOVERNMENT RESOURCE MARKET Circular Flow Model