Download MACRO 1-page graph summary 2011

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
Qty
Food
Increasing Cost PPF
10
.
---------- B
-----------
5
5
10
Qty
Shelter
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
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
AD & Old AS Model:
AS
PL
Classical Range
Intermediate Range
Keynesian Range
AD
Real GDP
AD is anything included in GDP. (GDP = C + I + G + NX)
C ↑ => AD shifts right Imports ↑ => no effect!
The Keynesian range of AS is 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)
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!
Money Market Graph
MS1
Nominal
Interest
Rate
MS2
Real
Interest
Rate
Loanable Funds Market
S1
---------
i2 --------------MD
--------------
-------------
R1
i1
Q1
Qty of $
Label Nominal Interest Rate! Fed controls MS through
open market operations to target 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
E1
D1
Qty
Loanable Funds
Supply = National Savings (Public + Private savings)
Demand = Investment Demand (business who 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
Long Run Phillips Curve
Inflation
Rate
(percent
per year)
Inflation
Rate
B
6
Long-run
Phillips curve
High
inflation
B
Low
inflation
A
A
2
Phillips curve
4
0
7
2. . . . but unemployment
remains at its natural rate
in the long run.
Unemployment
Rate (percent)
0
Illustrates trade-off between Unemployment & Inflation
Can lower unemployment only by ↑ inflation. Shifts when
SRAS => but in opposite direction. Move up or down
SRPC as you move up/down SRAS
Consumption Function
DI = Savings + Consumption
MPS + MPC = 1
Slope = MPC Line = Autonomous C + MPC(DI)
Savings Function slope = MPS Increases in DI moves you
along line. S & C always shift in different directions
EXCEPT for ∆Taxes or Transfers will shift S + C in same
direction. (warning: right shift is a decrease!!)
Spending Multiplier = 1/MPS Tax multiplier = 1 less
Natural rate of
unemployment
Unemployment
Rate
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
Market for Foreign Currency
S1
Dollar Price
of a Euro
--------------
--------------
1.3 Dollars
Q1
D1
Qty of Euros
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.
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)