Transcript AP Macro review graphs

FED buys bonds from the public
Draw graph showing effect on
interest rate. What happens to
value of $ in foreign exchange
market?
i
Sm1
Sm2
Money
Market
i1
i2
Dm
Q1
Q2
Q
Draw graph showing effect on the
interest rate from increased
saving in the U.S. What happens
to nation’s capital stock?
i
Loanable
Funds
Market
SLF1
SLF2
i1
i2
DLF
Q1
Q2
Q
Effect on P and GDP when $
depreciates
P
ASLR
AS
AD/AS
P2
P1
AD2
AD1
Qf Q2
GDP
FED sells bonds. Draw graph
showing effect on interest rate.
What happens to the value of the
$ in the foreign exchange
market?
i
Sm2
Sm1
Money
Market
i2
i1
Dm
Q2
Q1
Q
Government & FED do nothing in
response to short-run recession
ASLR
P
ASSR1
ASSR2 AD/AS
P1
P2
AD
Q1
Qf
GDP
Effect on interest rate when
government runs a budget deficit
Loanable
Funds
Market
SLF
i
i2
i1
DLF2
DLF1
Q1
Q2
Q
Value of U.S. $ and Japanese
yen when U.S. interest rates
increase. What happens to
American imports and exports?
Foreign Exchange Market
P ($)
SYen1 P (Yen)
S$
SYen2
P2
P1
P1
D$2
P2
DYen
Q1 Q2
Yen
Q
D$1
Q1 Q2
Dollars
Q
Effect on P, GDP when $
appreciates
ASLR
P
AS
AD/AS
P1
P2
AD1
AD2
Q2
Qf
GDP
Effect on AD of FED’s bond
sales during inflation
P
ASLR
AS
AD/AS
P1
AD1
P2
AD2
Qf
Q1
GDP
Government and FED do nothing
in response to short-run inflation
ASSR2
P
ASLR
ASSR1
AD/AS
P2
P1
AD
Qf
Q1
GDP
Effect on AS and SRPC when
price of oil increases dramatically
P
Inflation
rate
AS2
AS1
P2
P1
SRPC2
AD
GDP2
GDP1
P goes up
Unemployment rises
GDP
SRPC1
Unemployment rate
Expansionary fiscal policy
during a recession
ASLR
P
AS
AD/AS
P2
P1
AD2
AD1
Q1
Qf
GDP
Effect on ASLR and LRPC when
U.S. capital stock increases
P
Effect on AS
ASLR1
ASLR2
Qf1
Qf2
Inflation
GDP
LRPC2 LRPC1
NRU2 NRU1 Unem
The FED and Monetary policy
• Always affects the money market
• Money market has vertical supply curve
• Increase in money supply lowers interest
rates – increases investment and
consumption and AD
• Lower interest rates cause $ to depreciate
– exports increase, imports decrease
• Decrease in money supply has opposite
effect
Loanable funds market
• S affected by savings; D affected by
increased budget deficit (increasing G or
decreasing taxes)
• Upward sloping S curve
• Increase in budget deficit raises interest
rates (decreases I and C – crowding out)
• Increase in savings lowers interest rates
• Changes in income affect BOTH savings
and consumption in the same direction
Short run vs. long run
• If unemployment rises in the short run,
wages fall
• Falling wages increases AS (shifts to right)
• If unemployment falls in the short run, wages
rise
• Rising wages decreases AS (shifts to left)
• Long run equilibrium is at the NRU
Phillips Curves
• Inflation on y axis; unemployment on x
• Short run slopes downward
• SRPC moves only when AS moves; if AD
moves, there is movement along the SRPC
• If AS shifts left, SRPC shifts right; if AS shifts
right, SRPC shifts left
• LRPC is vertical at the NRU
• LRPC moves when NRU changes (when
LRAS moves)
• If LRAS shifts left, LRPC shifts right
Capital Flows
• Money coming into a country increases D for that
currency and increases S of other currency
• Increasing D for a currency causes it to appreciate;
increasing S for a currency causes it to depreciate
• Higher interest rates in a country increases D for its
currency b/c it increases the D for that country’s
financial assets
• A higher P in a country decreases D for its currency
b/c people will buy another country’s goods instead
• Interest rates and value of $ move in same direction!
socks
50
Comparative Advantage
Finland
40
Swaziland
10
•Swaziland can produce 40
socks or 10 balloons using
the same # of resources
that Finland can use to
produce 50 socks or 50
balloons
50 balloons
• Which country has the absolute advantage in each product?
• Which country has the comparative advantage in each
product?
• What are Finland’s opportunity costs for the 2 goods?
Swaziland?
• If 2 pairs of socks are traded for 1 balloon, how will each
country benefit?
Jet packsComparative Advantage
•Djibouti can produce 50 jet
50
Djibouti
30
Botswana
10
packs or 10 time machines
using the same # of resources
that Botswana uses to produce
30 jet packs or 60 time
machines
60 time machines
• Which country has the absolute advantage in each product?
• Which country has the comparative advantage in each
product?
• What are Djibouti’s opportunity costs for the 2 goods?
Botswana’s?
• If 4 jet packs are traded for 1 time machine, how will each
country benefit?
Money Creation
• Deposits into banks are not new $.
• Checkable deposits increase by the same
amount that reserves increase
• Loans determined by excess reserves
• Required reserves = CHECKABLE
DEPOSITS x required reserve ratio!!!!!
• Increase in # of loans or deposits = 1st LOAN
x monetary multiplier
• When the FED buys bonds, that is NEW
MONEY! Is included in any increase in the
money supply!
Graphs to know!
• AD/AS, including LRAS – know how AS
moves as the economy “approaches long
run equilibrium”
• Money market vs. loanable funds market
• Phillips Curve
• Foreign exchange market