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THIS IS NOT A COMPREHENSIVE STUDY GUIDE!
This is a list of possible graphs you may see on the AP exam, as well as what you might have to do
with each one.
Macro graphs you need to know:
1. Production possibilities curve
2. Supply/Demand
3. Money Market
a. Nominal interest rate and Quantity of money
b. Vertical money supply curve-set by Fed, unaffected by interest rate
i. Moves with the tools of the Fed/Monetary policy
ii. Monetary policy targets interest rates, which change C, I, NX, then AD
c. Money demand is downward sloping
i. The amount of their own wealth people want to hold in liquid form
ii. Inversely related to nominal interest rate
d. Crowding out starts in this graph, as increases in G (fiscal policy) increase price levels
and real income
i. People demand more money, but money supply is fixed
ii. Interest rates increase, pulling back on AD
4. Loanable funds market
a. Real interest rate and quantity of loanable funds
b. Supply to the sky, demand to the land
c. Supply is made up of national saving (households and government)
i. Government budget deficit decreases supply, budget surplus increases supply
ii. Any incentive (like tax credits) that encourage saving increase supply
d. Demand is made up of investment and (in an open economy) NCO
i. Anything that increases either of these (like a tax credit or higher interest rate in
another country) increases D
5. NCO
a. Not an official graph for the AP exam
b. Part of our Macroeconomic model of the open economy to connect real interest rates to
NCO and then exchange rates
c. Capital flight-start in this graph and move the entire NCO curve (increase it for capital
flight, decrease for the country that benefits from capital flight)
i. Leads to a change in demand for the loanable funds market, then follow the new
interest rate through the model
6. Foreign exchange
a. In the Mankiw Macroeconomic model of the open economy:
i. Supply is vertical and equal to NCO
ii. Demand is downward sloping and equal to NX
iii. Label the graph real exchange rate and quantity of (currency)
iv. Movement up the real exchange rate means a currency has appreciated (gained
value)
1. This will cause NX to fall (country imports more because foreign goods
feel cheaper)
v. Movement down the real exchange rate means a currency has depreciated (lost
value)
1. NX will rise because the country will export more (their goods feel
cheaper to foreign countries)
b. For a simple FOREX question, just graph supply and demand as we normally use it and
use common sense
i. People plan on traveling to a country? Increase demand for the currency. It will
appreciate.
c. When directly comparing two currencies, replace “Real Exchange Rate” with a ratio of
one currency over the other
i. Whichever currency you are graphing goes on the bottom of the ratio
1. This is the currency on the x-axis. Bottom of the graph and bottom of the
ratio.
7. AD/AS
a. Labeled price level and Y (on the x axis)
i. Y is real GDP, real output, national income, national expenditures
1. Does not specifically measure unemployment, but is inversely related to
it (output increased, unemployment falls)
b. Vertical long run aggregate supply curve (LRAS)
i. Factors of production, technology, occurs at natural rate of unemployment
ii. Only moves due to permanent changes to factors of production or natural rate of
unemployment
c. Short run aggregate supply (SRAS) to the sky
i. Factors of production, technology, expected prices
d. Aggregate demand (AD) to the land
i. Consumption+Investment+Government purchases+Net Exports
e. Short run fluctuations left of LRAS are recessions (output down, unemployment up)
i. Stagflation-Decrease in SRAS, price levels up and output down
ii. Left alone, SRAS will increase due to falling wages
iii. Fiscal or monetary policy can be used to increase AD
f. Short run fluctuations right of LRAS are expansionary phases (output up,
unemployment down)
i. Left alone, SRAS will decrease due to rising wages and input prices
1. Returns to equilibrium output and natural rate of unemployment, but
with higher prices
ii. Fiscal or monetary policy can be used to decrease AD
8. Phillips curve
a. Labels: Inflation rate (y) and unemployment rate (x)
b. Long run Phillips Curve
i. Vertical, occurs at natural rate of unemployment
ii. Does not change with inflation, as it is based on natural rate of output, a real
variable
c. Short run Phillips Curve
i. Downward sloping
ii. Represents the tradeoff between inflation and unemployment-to decrease one,
you must increase the other
iii. Influenced by increasing or decreasing AD
d. Events that cause both to increase (like stagflation) or decrease led to a shift in SRPC
e. Changes in inflationary expectations also result in a new SRPC
f. Movements in:
i. AD: movement on SRPC
ii. SRAS: new SRPC
iii. LRAS: new LRPC
Micro graphs:
1. Production possibilities curve
a. Points that are inefficient, efficient, and not possible
b. Constant opportunity cost vs. increasing opportunity cost
c. Show a change in production possibilities for both goods
d. Show a change in efficiency for one good
2. Circular flow model
3. Marginal/Total Utility
a. Total utility-Label utility (y) and quantity (x)
i. Increases at a decreasing rate, then begins decreasing (upside down U)
b. Marginal utility-Label utility (y) and quantity (x)
i. Decreasing linear line
ii. When it crosses 0, that is when total utility (above graph) is maximized
4. Supply and demand
a. Shifts
b. Terminology-change in demand vs. change in quantity demanded
c. Surplus/shortage and how that is fixed
i. Adam Smith-Invisible Hand price control
5. Supply and demand with binding(effective)/nonbinding price ceiling (labeled)
a. Binding creates shortage
6. Supply and demand with binding(effective)/nonbinding price floor (labeled)
a. Binding creates surplus
7. Supply and demand with a tax on buyers
a. Market Q before and after tax
b. Figure out burden on buyers and sellers
c. Deadweight loss
d. Government Revenue
e. Effect of different elasticities
f. Move demand curve to top of wedge when finished
8. Supply and demand with a tax on sellers
a. Market Q before and after tax
b. Figure out burden on buyers and sellers
c. Deadweight loss
d. Government Revenue
e. Effect of different elasticities
f. Move supply curve to bottom of tax wedge when finished
9. Supply and demand with a higher world price
a. Market equilibrium
b. Amount of exports
c. CS, PS, TS & gains from trade before/after
10. Supply and demand with a lower world price
a. Market equilibrium
b. Amount of imports
c. CS, PS, TS & gains from trade before/after
11. Supply and demand with a lower world price and tariff
a. Market equilibrium
b. Imports before/after tariff
c. CS, PS, TS & gains from trade before trade, after trade, after tariff
d. Government revenue and DWL after tariff
12. Production Function
a. Units of output (y) and units of input (x)
i. Input is often labor, but can be anything
b. Increases at a diminishing rate, then begins to flatten at the top
i. Due to diminishing marginal product of input (usually labor)
1. Putting in one more unit of input leads to less and less output
13. Short run side-by-side individual competitive firm and market
a. Possible profits/loss
b. Change in market graph, then individual firm to restore equilibrium
14. Long run side-by-side individual competitive firm and market
a. Minimum ATC/zero profit condition equilibrium
b. Changes in market conditions leading to changes in firm
c. Restoring equilibrium
i. Constant cost-Return to P1 (You have a horizontal long run supply curve)
ii. Increasing cost-ATC goes up as firms enter the market (Long run supply is to
the sky)
15. Monopoly
a. MR<P
b. Faces downward sloping demand (they are the market)
c. Produce on decreasing portion of ATC (Economies of scale)
i. Competition not there to drive down price
d. Profit maximization: Go to MR=MC Q and mark price up to demand
e. Find deadweight loss
f. Can experience profit in the long run (only firm that can)
i. Barriers to entry prevent firms from entering
g. Revenue maximization: Go to where MR=0, mark up P to demand
h. Demand is unit elastic where MR=0
16. Monopolistic competition
a. Same graph as a monopoly
b. Technically demand is more elastic
i. Similar but differentiated goods
c. MR<P
d. Profit maximization at MR=MC, mark up price to demand
e. Find DWL
f. Economic profit only in short run, no profit in long run
i. No barriers to entry-firms can enter
g. SR & LR-Downward sloping part of ATC
h. LR-Downward sloping part of ATC tangent to D
17. Payoff Matrix
18. Competitive Factor market for labor with MRP and MFC curves
a. MRP=Demand for labor
i. Downward sloping
ii. It is the value of the marginal product of labor
1. How much does each worker produce and what can I sell it for?
iii. MRP can move if the price of the good or the MPL of a worker changes
b. MFC=Supply curve
i. MFC is horizontal in a competitive market at the wage
ii. MFC can move if wages change
c. Profit maximization at MFC=MRP
19. Factor market-Monopsony
a. One buyer of labor
b. MRP still downward sloping
c. Supply to the sky
d. MFC above supply, steeper
e. Go to MFC=MRP and mark wage down to supply curve
20. Negative externality
a. Demand can be called marginal private benefit (MPB) because it is benefit only to the
consumer
b. Supply can be called marginal private cost (MPC) because it is cost felt only by the
producers
c. Move the supply curve up to get the marginal social cost (MSC). This is what the
production of this item really feels like to society
i. The gap between supply and MSC is equal to the amount of the externality
d. Identify both the market quantity and the socially optimal quantity (from the new
equilibrium)
i. The market always over produces when there is a negative externality
e. Find deadweight loss (triangle pointing at new equilibrium)
f. Solution-Per unit tax equal to the amount of the externality
i. Not a lump sum tax, this will not change behavior
g. The per unit tax will internalize the externality and move the supply curve up to the
MSC curve
21. Positive externality
a. Demand is MPB, supply MPC
b. Move the demand curve up to get the marginal social benefit (MSB). This is what the
value of the item really feels like to society.
i. The gap between demand and MSB is equal to the externality
c. Identify both the market quantity and the social optimal quantity (from the new
equilibrium)
i. The market always under produces when there is a positive externality
d. Find deadweight loss (triangle pointing at the new equilibrium)
e. Solution-Put unit subsidy equal to the amount of the externality
i. Not a lump sum subsidy, this will not change behavior
f. The per unit subsidy will internalize the externality and move the demand curve up to
match the MSB curve
22. Laffer Curve
a. Tax revenue (y) and tax rate (x)
b. Increases at a diminishing rate, then decreases
i. Tells us that increasing a tax increases revenue at first, but reaches a point where
it loses revenue