This Is a Very Efficient Way to Study for Your AP EXAM! You Should Know All of the Graphs

This is a very efficient way to study for your AP EXAM! You should know all of the graphs listed on the following 2 pages

MACRO GRAPH SUMMARY-2014-15

Constant Cost PPF Graph

Goal of Free Trade: On line is efficient. Above line is unobtainable in short run with current resources & technology. Curve represents countries “full potential”

to produce goods/services

AD & Old AS Model:

AD is anything included in GDP. (GDP = C + I + G + NX)

C ↑ => AD shifts right Imports ↑ => no effect!

TheKeynesian rangeof ASis during recessions.

GDP can ↑ without inflation in this flat AS section

When you reach “full employment” curve is vertical--no change in real GDP past that point. (Can use for AP test)

Money Market Graph

Label Nominal Interest Rate! Fed controls MS through open market operations totarget a short term interest rate Expansionary : buy bonds => MS right => i ↓=> AD ↑

Contractionary: sell bonds => MS left => i ↑=> AD ↓

MD is the preference to “hold money”. It rarely shifts => but would shift right if people wanted or needed to “hold” more money. Fed could offset any MD shift with policy

Goal: is to shift PPF right by: ↑ Technology, ↑ Labor Force, ↑ Human/Physical Capital,↑ Investment, etc….Shifts PPF right. Any right shift in PPF must shift LRAS right

“New” Classical Model for AS curve

Short run: Prices & Wages are sticky! Expected price level lags actual. Causes recessionary inflationary gaps

Long Run: Prices & wages perfectly flexible, ↑ real GDP not possible unless LRAS shifts right. Actual price level = expected price level in long run. An ↑ AD => only ↑ price level. Think classical economists!

Loanable Funds Market

Supply = National Savings (Public + Private savings)

Demand = Investment Demand (businesswho borrow $)

Use Real Interest Rate on this graph!

Crowding Out: Supply shifts left as Gov’t savings falls (less national savings) Private investor are “crowded out” by ↑ real interest rates. (less (I) capital investment!)

Real world example: Spain, Greece, Portugal. U.S.A. next?

Short Run Phillips Curve

Illustrates trade-off between Unemployment & Inflation Canlower unemployment only by ↑ inflation. Shiftswhen SRAS => but in opposite direction. Move up or down SRPCas you move up/down SRAS

Consumption Function

DI = Savings + Consumption MPS + MPC = 1

Slope = MPC Line = Autonomous C + MPC(DI)

Savings Functionslope = MPS Increases in DI moves you along line. S & C always shift in different directionsEXCEPT for ∆Taxes orTransfers willshift S + C in same direction. (warning: right shift is a decrease!!)

Spending Multiplier = 1/MPS Tax multiplier = 1 less

Market for Foreign Currency

All “swapping” for foreign currency operates “offshore” at the House of FX (which is the market for foreign exchange). Determine who will demand what currency—then go to the House of FX &swap currencies. No effect on money supply! If demand for a currency rises => that currency appreciates.

Long Run Phillips Curve

Long Run: vertical at full employment . No trade-off in long run. ↑ inflation does NOT↑ real GDP or # of jobs

Can’t shift unless natural rate of employment changes

Long Run Equilibrium

Long Run: due to sticky prices/wages being perfectly flexible, the Economy finds equilibrium at the natural rate of output.(full potential) Actual price level = Expected price level. Growth Limits: You cannot achieve a higher GDP in the short run without accepting higher inflation. You must shift PPF curve right (which shifts the LRAS right) to achieve higher real GDP growth

Example:

If Real Interest rates rise in USA relative to Japan:

1) Japanese exchange Yen for dollars:(to save in US)

2) Demand for Dollars shifts right. (dollar ↑)

3) Supply of Yen shifts right (Yen ↓)

4) End result: Dollar appreciates Yen depreciates

BALANCE OF PAYMENTS Account:

Current Account = NX + investment income - a country’s trade balance + bond interest/stock dividends Financial Account=U.S.assets sold – foreign assets bought. Generally Current + Financial account = ZERO

U.S.A. current is negative so financial is positive. Why: USA spends more on imports than it receives on exports. (- current) Chinese buy our Gov’t bonds (+ financial)