3. Production Possibilities Frontier
Supply and Demand
Currency Market
AD-AS Model
Loanable Funds Model
Phillips Curve
Money Market

4. 1 Production Possibilities Graph Assumptions: Movements
Full Employment
Fixed Resources and Technology
Movements
Along curve shows opportunity cost
Outward shift illustrates economic growth
Inward shift indicates destruction of resources
Producing Capital Goods will lead to greater economic growth than producing consumer goods. (Butter will lead to more growth than guns)

5. Production Possibilities Graph
Capital Goods
Points A,B,C, are efficient pts.
Point D is underutilization
Point E is economic growth A E
May Lead to most
Future growth
May Lead to most
Future economic growth B D C
Consumer Goods

6. 2
Supply and Demand

7. Demand Changes when: Income changes
Related Products, complements and substitutes, (price or quality change)
Expectations (future price change)
Consumers (more or less added)
Tastes, Fads, Preferences change

8. Demand Increase: As Demand Increases, Price and Quantity Increase as well.

9. Demand Decrease: As Demand Decreases, Price and Quantity decrease as well

10. Supply Changes When: Input prices change (resources and wages)
Government (tariffs, quotas, and subsidies)
Number of sellers change
Expectations (about price and product profitability change)
Disasters (weather, strikes, etc..)

11. Supply Increase: As Supply Increases, Quantity Increases, but Price Falls.D1
Quantity Q1 Q2

12. Supply Decrease: As Supply Decreases, Quantity Decreases, but Price Increases.

13. Price Floor D S P P Surplus Qd Price set above equilibrium
Producers produce too much
Consumers demand less than what is produced
Surplus created – Qs > Qd D S P P
Surplus Qd

14. Price Ceiling D S P P Shortage Qs Qd Qd Price set below equilibrium
Consumers demand too much
Producers produce too little
Shortage created – Qd > Qs D S P P
Shortage Qs Qd Qd

15. 3
Currency Market

16. Currency Terms
Appreciation: Currency is increasing in demand (stronger dollar)
U.S. Currency will appreciate when more foreigners: travel to the U.S., buy more U.S. goods or services, or buy the U.S. dollar to invest in bonds

17. Currency Terms
Depreciation: Currency is decreasing in demand (weaker dollar) Being SUPPLIED in exchange for other currency.
U.S. Currency will depreciate when fewer foreigners: travel to the U.S., buy fewer U.S. goods or services, or sell the U.S. dollar to invest in their own bonds

22. 4
AD-AS Model

23. Aggregate Demand Downward sloping: Real-Balances Effect: change
in purchasing power
2. Interest-Rate Effect: Higher
interest rates curtail spending
Foreign Purchase Effect:
Substitute foreign products for
U.S. products
Price
Level
AD (C + I + G + X)
Real GDP

24. Aggregate Demand Determinants of AD: C + I + G + Nx
An increase in any of these will increase AD and shift the curve to the right.
A decrease in any of these will cause a decrease in AD and shift the curve to the left

25. Aggregate Demand Determinants
Consumption
Wealth
Expectations
Debt
Taxes
Investment
Interest Rates
Expected Returns
Technology
Inventories
Government
Change in Gov. spending
Net Exports
National Income Abroad
Exchange Rates

26. Aggregate Supply Factors:
R: resource prices (wages and materials, as well as OIL)
A: actions by government (Taxes, Subsidies, more regulation)
P: productivity (better technology)

27. Aggregate Supply Short Run: Long Run:
Assumes that nominal wages are “sticky” and do not respond to price level changes.
Is Upward sloping as businesses will increase output to maximize profits
Long Run:
Curve is vertical because the economy is at its full-employment output.
As prices go up, wages have adjusted so there is no incentive to increase production.

29. Real GDP or Real output or Real income

30. Recessionary Gap

31. Inflationary Gap

33. 5
Loanable Funds

34. Loanable Funds Market
Demand for Loanable Funds
Loanable funds are used for three purposes
Business Investment
Government deficit financing
International Investment or lending

35. Demand for Loanable Funds Curve
The demand for loanable funds shows the relationship between the real interest rate and the quantity of loanable funds demanded.  It shows that the quantity of loanable funds will be lower at a high real interest rate than at a lower real interest rate.

36. Loanable Funds Market
Supply of Loanable Funds
Loanable funds come from three places
Private savings
Governmental budget surpluses
International borrowing

37. Supply of Loanable Funds Curvei 6% 4% 40 60 LF

38. Equilibrium in the Loanable Funds Market

39. Shifts in Demand for Loanable Funds
The major determinant of the demand for loanable funds is expected profit.  When the expected profit changes, the demand for loanable funds changes.  The greater the expected profit of new capital, the greater is the amount of investment and the greater is the demand for loanable funds.  When the expected profit increases and we earn more from our investment, the more affordable it becomes to borrow loanable funds – even when the interest rate.

40. Shifts in Supply of Loanable Funds
Disposable income (shifts the supply of loanable funds)
Wealth (shifts the supply of loanable funds)
Expected future income (shifts the supply of loanable funds)
Default risk (shifts the supply of loanable funds)

41. 6
Phillips Curve

44. 7
Money Market