Name:______

Macroeconomics Key Graphs

The Business Cycle

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Production Possibilities Curve

U – Attainable but inefficiency
X – Unattainable in the present
A – Efficient (productive, allocative)
Outward shift can occur with new resources or technology.
Inward shifts can occur with war, plagues.
Bowed curve means increasing opportunity cost for both products. /

Short-Run Aggregate Supply

·  Keynesian Range: Sticky wages make AD perfectly elastic
·  Intermediate Range: Upward sloping portion
·  Classical Range: At or near full employment and increase in AD results in high inflation. The car can’t go faster

Supply & Demand

Points on curve = changes in quantity supply or demand.
Above equilibrium = surplus
Below equilibrium = shortage
Circular Flow
·  The inner flow (green) is the flow of dollars in the economy
·  The outer flow (blue) is the flow of inputs and outputs /

Recessionary Gap

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Inflationary Gap

At full-employment output GDPf, actual deficit is ab, the structural deficit is ab, and cyclical deficit is 0.
At recessionary output GDPr, the actual budget is the structural deficit is ed (=ab) and the cyclical deficit is dc. /

Fisacl Policy

Expansionary Tools-

1. Increase Government Spending
2. Decrease Taxes

Contractionary Tools-

1. Decrease Government Spending
2. Increase Taxes /

Monetary Policy

Expansionary Tools-

1. Buy bonds, securities, treasuries
2. Decrease reserve requirement
3. Decrease Discount rate

Contractionary Tools-

1. Sell bonds, securities, treasuries
2. Increase reserve requirement
3. Increase Discount rate
Key Formulas:
·  GDP = C + I + G + (Exports-Imports)
·  Nominal GDP = Real GDP x Price Index/100
·  Unemployment rate = Unemployed/Labor force
·  Consumer Price Index = Price of Market Basket/Price of Base Year Market Basket x 100 / ·  Spending Multiplier = 1/MPS
·  Money/Monetary Multiplier = 1/Reserve Requirement
·  Nominal Interest Rate = Real Interest rate + Expected Inflation
·  Assets = Liabilities + Net Worth
Extended AD-AS Model
Long run and short run Aggregate Supply has increased over time, while Aggregate Demand has shifted rightward. These combined shifts show growth – increase in Real GDP to Q2 accompanied by some inflation to PL2. /

The Keynesian Three Step Transmission

Shows the result of Monetary policy. An increase of the money supply causess interest rates to fall causing investement and consumption to increase. More investment and consumption increases AD and increases price level and output.

The Phillips Curve

Shows tradeoffs between inflation and unemployment. To decrease inflation you will get some unemployment and vice versa. /

Consumption and Savings

Households consume most of their income. As income increases, savings increase in higher proportion than consumption. /

The Laffer Curve

Shows that a significant increase in the tax rate can decrease the incentive to work causing a fall in tax revenue.

Bond Prices & Interest Rates

·  When interest rates increase, price of old bond must decrease (or no one will want to buy them)
·  When interest rates decrease, price of old bond increase (more people will want to buy them)
·  Bond prices are determined by bond supply and demand. /

Loanable Funds Market

Shows the supply and demand for loans and equilibrium sets the real interest rate.
When the government borrows money to increase spending, DLF increases causing interest rate to increase and investment to fall. This is CROWDING OUT. /

Foreign Exchange

·  If demand for Canadian goods increases, the demand for Canadian dollars increases causing it to appreciate.
·  If Canadians want a different currency the supply of Canadian dollars available to exchange increases.
·  If the interest rate in Canada is significantly higher than the U.S., then Americans will demand more Canadian dollars to earn higher returns in Canadian banks. The Canadian dollar appreciates. The U.S. dollar depreciates.