1. 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
Pizzas (hundred thousands)

2. 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
Pizzas (hundred thousands)

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

4. 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
Wheat (tons)
Wheat (tons)

5. 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 Q
Quantity of Corn

6. 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 Q
Quantity of Corn

7. 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 Q
Quantity of Corn

8. 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

9. 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

10. 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

11. 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
Amount of money demanded
(billions of dollars)

12. 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

13. 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
Investment (billions of dollars)

14. 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

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

16. 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

17. 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…

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

19. 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

20. 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

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

22. 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

23. 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

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

25. + = 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
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) 10
7.5 5
2.5 Dm

26. 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
Amount of money demanded
(billions of dollars)

27. 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
Unemployment rate (percent)

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