Economic Graphs to Know

7/31/2019 Economic Graphs to Know

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Redelsheimers Graphs to Know AP Macro Review Copyright 2005


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Q

Q

Rob

ots(thousa

nds)

Pizzas (thousands)

14131211109

87654321

1 2 3 4 5 6 7 8

AB

C

D

E

W

Attainable

butInefficient

Unattainable

Attainable& Efficient

PRODUCTION POSSIBILITIES


3/21


Production Possibilities Curve

Shows:

Opportunity Cost: More pizzas means lessrobots

Unempolyment / Inefficiency: Inside the curve Efficiency: On the curve

Economic Growth: Curve shifts to the right


4/21


Price

Level

Real Domestic Output, GDP

Q

P AS

AD

AGGREGATE DEMAND / AGGREGATE SUPPLY

Equilibrium

Real Output

Y

P


5/21


Price

Lev

el


Q

PAS

AD

AS/AD: Recession

Equilibrium

Real Output

ASLR

Long Run Aggregate

Supply (Full Employment)

Y

P


6/21


Price

Lev

el


Q

PAS

AD

AS/AD: Inflation: Beyond Full Employment

Equilibrium

Real Output

ASLR

Long Run Aggregate

Supply (Full Employment)

Y f Y 1

P


7/21


Price

Lev

el


Q

PAS

AD1

INCREASES IN AD:DEMAND-PULL INFLATION

P2

P1

AD2

Yf Y1


8/21


Price

Lev

el


Q

PAS

1

AD1

DECREASES IN AS:COST-PUSH INFLATION

P2

Y1Y 2

AS2

P1


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AGGREGATE SUPPLY /

AGGREGATE DEMAND

SHOWS:

National Output: (Real GDP)

Employment and Unemployment Price Level

Aggregate Demand Curve

Down Sloping Due To: Real-Balances Effect Interest-Rate Effect Foreign Purchases Effect


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NOMINALintere

strate,

i

Quantity of Money

Dm

Sm

THE MONEY MARKETShift the Supply curve

(always vertical) when FED

changes the money supply to

change nominal interest

rates!

i

If Nominal GDP Increases,

Transactions Demandincreases, and Dm CurveShifts to the right.

If Asset Demand for moneyincreases, Dm Curve shiftsto right


11/21


Real domestic output, GDP

Dm

Investment

Demand Graph

rateofinterest

,i

10

8

6

0

Qty. of Money Amount of investment, I

MONETARY POLICY AND EQUILIBRIUM GDPSm1

AS

AD1(I=$15)

P1

10

8

6

0

Sm2

AD3(I=$25)

P2

If the Money SupplyIncreases to Stimulatethe Economy

Interest Rate DecreasesInvestment Increases

AD & GDP Increaseswith slight inflation

Pricelevel

AD2(I=$20)

P3

Sm3

Increasing money supplycontinues the growthbut, watch Price Level.

ID

rateofintere

st,i

Money Market

Graph


12/21


RealInterestRate,r

Quantity of Loanable Funds

LOANABLE FUNDS MARKET

r

D

Q

S

This graph showshow the supply anddemand for loanablefunds affects realinterest rates!


13/21


Loanable Funds Market Graph(Long-Term Interest Rates)

What changes Supply:

1. Increase in

Household savings

2. Increase in Govtsavings

3. Increase in Business

savings

4. Increase in Business

savings

5. Increase in

Foreigners savings

What changes Demand:

1. Increase in Household

borrowing

2. Increase in businessInvestment

3. Increase in Foreign

borrowing

4. Increase in Governmentborrowing (When the

govt has a budget

deficit!) = (the crowding

-out effect)


14/21


The Market for Yen

Quantity of Yen

Do

llarPriceof1Y

en

0

P

QQe

Sy

Dy

THE FOREIGN EXCHANGE MARKET


15/21


P

Q

Dy

Sy

Dolla

rpriceofon

eYen

Quantity of Yen

3

2

1

Dollardepreciates

Dollarappreciates

The Market for Yen

THE FOREIGN EXCHANGE MARKET


16/21


Annualrat

eofinflation

(percent)

Unemployment rate (percent)

7

6

5

4

3

2

1

0

1 2 3 4 5 6 7

As inflation declines...

THE PHILLIPS CURVE CONCEPT

unemploymentincreases

And vice versa!

SRPC


17/21


Annualrate

ofinflation

(percent)

Unemployment rate (percent)

7

6

5

4

3

2

1

0

1 2 3 4 5 6 7

THE PHILLIPS CURVE CONCEPT

SRPC 1

LRPC = Is the naturalRate of Unemployment

SRPC 2

With Stagflation, ShiftSRPC to the right

With AD shift,move along

existing SRPC


18/21


Phillips Curve

Short run trade-off between inflation and

unemployment.

In the Long Run there is no trade off. The long

run Phillips curve is Vertical!

Stagflation (an increase in Unemployment and

inflation) or an Aggregate Supply Shock will shift

the SRPC to the right. Decreases in Inflation and Unemployment will

shift the SRPC to the left. (and increase in AS

would cause this)


19/21


TWO WAYS TO SHOW ECONOMIC GROWTH

A

B

C

D

C

apitalGoods

Consumer Goods

PriceLevel

Real GDP

ASLR1 ASLR2

Q1 Q2


20/21


Causes of Economic Growth

1. Increased investments in Capital Stock.

2. Increased investments in Human Capital

(education, training) and increases in quantity

of human resources

3. New Technology leading to increased

productivity

4. Increase in quantity and quality of naturalresources


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BUSINESSES HOUSEHOLDS

RESOURCESINPUTS

$ COSTS $ INCOMES

PRODUCTMARKET

GOODS &

SERVICES

GOODS &

SERVICES

$ CONSUMPTION$ REVENUE

GOVERNMENT

RESOURCE

MARKET

Circular Flow Model

Documents

Economic Graphs to Know