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Graphs
The AP Macroeconomics exam requires you to understand and correctly draw the important
graphs you have studied throughout the course. The following pages are designed to help you
learn the various graphs that you will be required to use to answer questions on the exam. You
should be comfortable and confident drawing each of them and using them to answer questions. Correct labeling of axes is especially important. Also, be sure that you understand what
causes changes in the various diagrams and the resulting effects on the variables represented on
both the vertical and horizontal axes of each graph. Rest assured that you will be required to
draw and analyze at least four different graphs on the free-response section of the exam.
To prepare for the AP Macroeconomics exam, practice answering free-response questions
that require you to draw graphs. You can find sample free-response questions on previous
exams released by the College Board and in your textbook. Make sure that you also look at answer keys and scoring guidelines provided to make sure you are answering correctly and that
you understand how your AP exam is scored. You should also get into the habit of using graphs
to help you answer questions even when a graph is not required. For example, drawing a supply
and demand graph can often help you answer multiple-choice questions that involve the supply
and demand model. And a graph can often be used to help explain an answer to a free-response
question, even if a graph is not explicitly required. Remember, a picture can be worth a thousand words!
Understanding how to use economic models is central to any economics course and therefore it is central to the AP Macroeconomic exam. So, if you understand and can apply the models presented in this section, then you will have gone a long way in striving for a five!
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Preparing for the AP Macroeconomics Exam
The Production
Possibilities Curve
The production possibilities
curve illustrates trade-offs
and opportunity cost incurred as a result of scarce
factors of production.
The concave shape indiicates that the opportunity
cost of producing more
consumer/capital goods is
ever increasing.
In the graph on top, an
economy that is fully employing all of its available
resources by currently producing at point A and that
wishes to produce instead
at point B must sacrifice
2 units of capital goods in
order to gain about 1 1/2
units of consumer goods.
The bottom graph illustrates the effect of an increase in available factors of
production, the quality of
those factors of production,
increased technology, or increased productivity.
9
8
10
Consumer
goods
Capital
goods
10
ppe
0
1
2
3
4
5
6
7
8
9
10
Consumer goods
Preparing for the AP Macroeconomics Exam
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Supply a nd Demand
The supply and demand
model illustrates producers'
willingness and ability to
produce a good or service
(supply) combined with
consumers' willingness and
ability to consume a good
or service (demand). The intersection of these two functions determines the
equilibrium price and equilibrium quantity.
Price
P
Quantity
Changes in Demand
in M.E.R.LT.
AD.:AP&AO
Dright.:PT&QT
D left .:
&0
Changes in Supply
in NIC.E.J.A.G.T.
AS.:AP&AQ
S right .:
Demand Shifters
Supply Shifters
M.E.R.LI
N.LC.E.J.A.G. T
M— market size
as in, "Nice Jag, T!"
E— expected prices
N— natural phenomenon
R— related prices
(complements and
substitutes)
/— input prices
I— income
E— expected prices
T— tastes
J— joint production prices
(think beef and leather)
& QT
sieft.:PT8,01
C— competition
A— alternate production prices
(think corn and wheat)
G— government taxes and
subsidies
T—technology
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Preparing for the AP Macroeconomics Exam
Foreign Exchange Market
Market which brings together people who need to
buy or sell one currency in
exchange for the currency of
another country.
The equilibrium price is referred to as an exchange rate
and is denoted as (e).
Exchange rate
$/€
e
The graph to the right illustrates the market for the
E.U. euro in terms of the
U.S. dollar.
€
Exchange rates are determined by
Quantity of €
Relative S.T.RI.N.G.
Relative Speculation
Relative Tastes
Relative Rates (interest)
Relative Inflation
Relative Net Exports
Relative Growth
Preparing for the AP Macroeconomics Exam
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Loanable Funds Market
Market which brings together savers and borrowers.
Savers supply loanable
funds and borrowers demand them.
Real interest
rate
r%
The equilibrium price which
equates savings to borrowing is the real interest rate
(r%).
r
Saving and borrowing go by
different names, depending
on which sector of the economy is doing the saving and
borrowing.
a if
Quantity of
loanable funds
A Saving = A S
A Borrowing = A D
AS.:Ar%&A Olf
A D .: A r% & A Olf
S right .: r% & Olf T
S left .: r% T &
& QIfT
D left.:r%.L& QlfL
Households — Saving
Households — Borrowing
Business — Retained Earnings
Businesses — Capital Investment
Government — Budget Surplus
Government — Budget Deficit
Foreign Sector —
Foreign Sector — Foreign borrowing
Capital inflows (+)
Capital outflows (—)
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D right .:
Preparing for the AP Macroeconomics Exam
Money Market
Market which brings together the central bank (the
Fed) and everybody else in
the economy.
The Fed supplies money
(M1) and everyone else demands it.
Nominal
interest
rate
The equilibrium price,
which equates the supply of
money with the demand for
money, is the nominal interest rate (i%).
The supply is vertical because the central bank issues
the money independent of
the interest rate, so that at
any point in time, the supply of money is the stock of
money available.
The demand for money reflects the economy's liquidity preference or willingness
to hold cash at various interest rates. The demand for
money is never zero because
there is always transaction
demand regardless of the interest rate.
MS
i%
MD
Quantity of
money
A Federal Reserve Policy = A MS
A Nominal GDP = A MD
AMS.:Ai%&AQM
AMD.:Ai%&NOAin QM
MS right .: i% & QM T
MD right .: i T
S left .: i% T & QM
D left .: i%
Preparing for the AP Macroeconomics Exam
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Aggregate Supply and
Aggregate Demand
The aggregate supply and
aggregate demand model illustrates the economy as a
whole. Aggregate supply
represents producers' willingness and ability to produce all of the output of the
nation at various price levels. Aggregate demand reflects the private, public,
and foreign sectors' willingness and ability to purchase
the output at various price
levels.
Notice in the graph that
there are two aggregate supply curves. SRAS refers to
the short-run aggregate
supply. LRAS refers to longrun aggregate supply. In the
short run, firms willingly
produce more output as
price level changes because
inflexible input prices allow
firms to experience profits.
In the long run, input prices
adjust to change in the price
level so firms have no incentive to vary output as price
level changes.
Price
level
PL
A PILE. = ASRAS
O SRAS PL & t RGDP
A C.Ig.G.Xn = 0 AD
AD .: O PL & L RGDP
SRAS right .: PL L&RGGP T
AD right .: PL T & RGDP T
SRAS left .: PL T & RGDP
AD left .: PL & RGDP.L
PILE. = things that change firms'
unit production costs
P— productivity
C.Ig.G.Xn = the spending that comes
from the different sectors of the economy
/— input prices
C— consumption (household
spending)
L — laws, regulations, taxes, and
subsidies on businesses
Ig — investment (business spending)
E— expected inflation
G— government spending
Xn — net exports (net foreign
spending)
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Preparing for the AP Macroeconomics Exam
The Phillips Curve
The Phillips curve can be
further divided into shortrun and long-run versions.
The short-run Phillips curve
shows the trade-off that exists between inflation (it%)
and unemployment (u%) in
the short run.
Inflation
rate
The long-run Phillips curve
exists at an economy's natural rate of unemployment
(natural u%) and shows that
no relationship exists between inflation rates and
unemployment rates in the
long run.
LRPC
infl. %
SRPC
natural u% Unemlpoyment
rate
A SRAS= — ASRPC
A AD= movement along SRPC
Think of SRAS and SRPC as
mirror images.
A AD .: slide along SRPC
A SRAS — z SRPC
SRAS right .: SRPC left
70/0 & u%
SRAS left .: SRPC right
.: A
& A u%
AD right .: slide up SRPC
rc% T & u%1
AD left .: slide down SRPC
rc% & u% T
.:70/0T&u%T
A natural u%
A LRPC
natural u% increase = LRPC right
natural u% decrease = LRPC left
Preparing for the AP Macroeconomics Exam
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