1. 8 MAIN GRAPHS TO KNOW
AP MACROECONOMICS

2. AGGREGATE DEMAND CURVE
Price level AD
Real domestic output, GDP

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

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

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

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

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

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

9. 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

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

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

12. 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

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

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

15. 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
Amount of money demanded
(billions of dollars)

16. 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
Amount of money demanded
(billions of dollars)

17. 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
Amount of money demanded
(billions of dollars)

18. 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
Amount of money demanded
(billions of dollars)

19. Interest Rate – Investment Relationship16 14 12 10 8 6 4 2
INVESTMENT
DEMAND
CURVE
and interest rate, i (percents)
Expected rate of return, r,
I D
Investment (billions of dollars)

20. Investment Demand

21. CIRCULAR FLOW DIAGRAM

22. Economic Growth PRODUCTION POSSIBILITIES CURVE Capital Goods b aB D
Consumer Goods

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

24. 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

25. 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

26. 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

27. 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.

28. 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

29. 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

30. 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.

31. 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
Unemployment rate (percent)