Download Macroeconomics Key Graphs

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Macroeconomics Key Graphs
The Business Cycle
Production Possibilities
Curve
Short-Run Aggregate Supply
X
A
Supply & Demand
Points on curve = changes in quantity
supply or demand.
Above equilibrium = surplus
Below equilibrium = shortage
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.
Circular Flow
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 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
Recessionary Gap
Inflationary Gap
The inner flow (green) is the flow of dollars
in the economy
The outer flow (blue) is the flow of inputs
and outputs
Fisacl Policy
Expansionary Tools1. Increase
Government
Spending
2. Decrease Taxes
Real Output
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.
Contractionary Tools1. Decrease
Government
Spending
2. Increase Taxes
Monetary Policy
Expansionary Tools1. Buy bonds, securities,
treasuries
2. Decrease reserve
requirement
3. Decrease Discount rate
Contractionary Tools1. Sell bonds, securities,
treasuries
2. Increase reserve requirement
3. Increase Discount rate
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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
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


Spending Multiplier = 1/MPS
Money/Monetary Multiplier = 1/Reserve
Requirement
Nominal Interest Rate = Real Interest rate +
Expected Inflation
Assets = Liabilities + Net Worth
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.
PL2.
The Phillips Curve
Consumption and Savings
The Laffer Curve
C
Shows tradeoffs between inflation and
unemployment. To decrease inflation you will
get some unemployment and vice versa.
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.
Households consume most of their
income. As income increases,
savings increase in higher proportion
than consumption.
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.
Shows that a significant increase in the
tax rate can decrease the incentive to
work causing a fall in tax revenue.
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.