Transcript 8 MAIN GRAPHS TO KNOW

8 MAIN GRAPHS TO KNOW
AP MACROECONOMICS
Price level
AGGREGATE DEMAND CURVE
AD
Real domestic output, GDP
CHANGES IN AGGREGATE DEMAND
Price level
Aggregate Demand
Can Increase
AD2
AD1
Real domestic output, GDP
Price level
CHANGES IN AGGREGATE DEMAND
Aggregate Demand
Can Increase
…or Decrease
AD3
Real domestic output, GDP
AD1
AGGREGATE SUPPLY
Long Run
Price level
PL
ASLR
Long-run
Aggregate
Supply
Full-Employment
Yf
Real domestic output, GDP
Y
AGGREGATE SUPPLY
Short Run
Price level
PL
AS
Aggregate
Supply
Short-run
FullEmployment
Yf
Real domestic output, GDP
Y
AGGREGATE SUPPLY
Changes in Aggregate Supply
Price level
PL
AS3
Decrease In
Aggregate
Supply
AS1
AS2
Increase In
Aggregate
Supply
Real domestic output, GDP
Y
EQUILIBRIUM AND CHANGES
IN EQUILIBRIUM
AS
Price Level
PL
100
92
a
b
Equilibrium
Real Output
AD
Y
Real Domestic Output, GDP
INCREASES IN AD:
DEMAND-PULL INFLATION
Price Level
PL
AD1
AS
AD2
PL2
PL1
Yf
Y1
Real Domestic Output, GDP
Y2
Y
DECREASES IN AD: RECESSION
& CYCLICAL UNEMPLOYMENT
Price Level
PL
AD2
AD1
AS
b
a
PL1
c
Y1
Yf
Real Domestic Output, GDP
Y
DECREASES IN AS:
COST-PUSH INFLATION
AS2
Price Level
PL
AS1
b
PL2
a
PL1
AD1
Y1
Yf
Real Domestic Output, GDP
Y
INCREASES IN AS:
FULL EMPLOYMENT
…With Price-Level Stability
AS
AS
PL
1
PL3
Price Level
PL2
PL1
2
b
a
AD1
Y1
Y2 Y3
Real Domestic Output, GDP
AD2
Y
GROWTH IN THE AD-AS MODEL
ASLR1 ASLR2
C
Price Level
Capital Goods
A
B
D
Consumer Goods
Y1 Y2
Real GDP
ECONOMIC GROWTH IN THE
EXTENDED AD – AS MODEL
ASLR1
ASLR2
AS2
Price Level
AS1
PL2
PL1
AD2
AD1
o
Y1
Y2
Real GDP
Rate of interest, i (percent)
THE MONEY MARKET
Sm
Suppose the money
supply is decreased
from $200 billion, Sm,
to $150 billion Sm1.
10
7.5
ie
5
Dm
2.5
0
0
50
100
150 200 250 300
Amount of money demanded
(billions of dollars)
Rate of interest, i (percent)
THE MONEY MARKET
Sm1
Sm
10
A temporary shortage
of money will require
the sale of some assets
to meet the need.
7.5
ie
5
Dm
2.5
0
0
50
100
150 200 250 300
Amount of money demanded
(billions of dollars)
Rate of interest, i (percent)
THE MONEY MARKET
Sm
10
Suppose the money
supply is increased
from $200 billion, Sm,
to $250 billion Sm2.
7.5
ie
5
Dm
2.5
0
0
50
100
150 200 250 300
Amount of money demanded
(billions of dollars)
Rate of interest, i (percent)
THE MONEY MARKET
Sm Sm2
10
7.5
ie
5
Dm
2.5
0
A temporary surplus
of money will require
the purchase of some
assets to meet the desired level of liquidity.
0
50
100
150 200 250 300
Amount of money demanded
(billions of dollars)
Interest Rate – Investment
Relationship
Expected rate of return, r,
and interest rate, i (percents)
16
14
INVESTMENT
DEMAND
CURVE
12
10
8
6
4
2
ID
0
5
10
15
20
25
30
35
40
Investment (billions of dollars)
Investment Demand
CIRCULAR FLOW DIAGRAM
PRODUCTION POSSIBILITIES CURVE
Economic
Growth
Capital Goods
C
A
b
a
0
B
D
Consumer Goods
The Market for Loanable Funds
Interest
Rate
Supply
5%
Demand
0
$1,200
Loanable Funds
(in billions of dollars)
Copyright©2004 South-Western
An Increase in the Supply of Loanable Funds
Interest
Rate
Supply, S1
S2
1. Tax incentives for
saving increase the
supply of loanable
funds . . .
5%
4%
2. . . . which
reduces the
equilibrium
interest rate . . .
Demand
0
$1,200
$1,600
Loanable Funds
(in billions of dollars)
3. . . . and raises the equilibrium
quantity of loanable funds.
Copyright©2004 South-Western
An Increase in the Demand for Loanable Funds
Interest
Rate
Supply
1. An investment
tax credit
increases the
demand for
loanable funds . . .
6%
5%
2. . . . which
raises the
equilibrium
interest rate . . .
0
D2
Demand, D1
$1,200
$1,400
Loanable Funds
(in billions of dollars)
3. . . . and raises the equilibrium
quantity of loanable funds.
Copyright©2004 South-Western
The Effect of a Government Budget Deficit: Market for LF
Interest
Rate
S2
Supply, S1
1. A budget deficit
decreases the
supply of loanable
funds . . .
6%
5%
2. . . . which
raises the
equilibrium
interest rate . . .
Demand
0
$800
$1,200
Loanable Funds
(in billions of dollars)
3. . . . and reduces the equilibrium
quantity of loanable funds.
Copyright©2004 South-Western
Foreign Exchange Market
The Market for EUROS
Dollar
Price
Per
Euro
Supply of Euros
Supply of Euros1
“A”
$/Euro*
“Now we
Have more
Euros!
“B”
($1.00)
$/Euro1
($.50)
(“How many
Dollars does
it
Take to buy
a
Euro”)
“Take my
Euros!
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.
Foreign Exchange Market
The Market for EUROS
Dollar
Price
Per
Euro
Supply of Euros
Supply of Euros1
“A”
$/Euro*
“Now we
Have more
Euros!
“B”
($1.00)
$/Euro1
(“How ($.50)
many
Dollars does
it
Take to buy
a
Euro”)
“Take my
Euros!
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
Foreign Exchange Market
The Market for Dollars
Euro
Price
Per
Euro/$1
Dollar
(€2.00)
Supply of $
“B”
“A”
Euro/$*
(€.1.00)
(“How many
Euros does
it
Take to buy
a
Dollar”)
D$1
“Give me $$$”
Demand for $
“Europeans are
DEMANDING
Dollars from us!”
Q$* Q$1
Quantity of Dollars
After the Europeans have given up their Euros, they are going to want
(DEMAND) Dollars for those Euros.
The DEMAND for the Dollar will INCREASE
FOREX
Foreign Exchange Market
The Market for Dollars
Euro
Price
Per
Euro/$1
Dollar (€2.00)
“B”
Supply of $
“A”
Euro/$*
(€.1.00)
(“How many
Euros does
it
Take to buy
a
Dollar”)
D$1
Demand for $
Q$* Q$1
“Europeans are
DEMANDING
Dollars from us!”
“Give me $$$”
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.
THE PHILLIPS CURVE CONCEPT
Annual rate of inflation
(percent)
7
As inflation declines...
6
5
unemployment
increases
4
3
2
1
0
SRPC
1
2
3
4
5
6
Unemployment rate (percent)
7