Essential graphs for AP Macroeconomics

Production Possibilities Curve

A Concepts:
B • Points on the curve-efficient
G • Points inside the curve-inefficient
o W • Points outside the curve-unattainable with
o C available resources
d • Gains in technology or resources favoring
F D one good or both.
X
E

Demand and Supply Good Y

√ Market clearing equilibrium
P Variations:
S
• Shifts in demand and supply caused by
changes in determinants
Pe • Changes in slope caused by changes in
elasticity
•Effect of Quotas and Tariffs
D

Qe Q

Floors and Ceilings

P P
S S

Floor Pe
Pe Ceiling

D D

QD Qe QS Q QS Qe QD Q

• Creates surplus • Creates shortage

• Qd<Qs • Qd>Qs
Consumer and Producer Surplus
Consumer surplus
P
S

Pe Producer surplus

Qe Q
Circular Flow Model-basic
In general terms,
The resource market can measure the GDP using the Income Approach
The product market can measure the GDP using the Expenditure Approach

Land, Labor, Capital & Entrepreneruial Ability

Resource Market
Resource Money Payments

Businesses Households

Money Payments for goods and services

Product Market

Goods and Services

Four phases of the business cycle

Real Long-term Growth Rate

GDP
THE BUSINESS CYCLE

Peak—prosperity
Recovery—Expansion

Recession—
Contraction
Trough—Depression

Periods of Time

Equilibrium using Aggregate Demand and Supply … occurs at the intersection of the
Aggregate Demand and Aggregate Supply curve setting the equilibrium price level and output. Qfis the
output at full employment.
Classical-Keynesian Model (not in favor) Extended AD/AS Model

AS P
P ASlr
r r
i
i ASsr
Equilibrium c
c e
e m
P L
L e
v
e e
v AD l
AD
e
l Q Qf
Real GDP Qf Real GDP
Phillips Curve-short and long run
potential output LR Phillips
curve
A Rate
of
PL S I
d n d
b f b
l
AD2 a
SR Phillips
t
a curve
a I

c
AD1 o
c
n
e
e AD3
Real GDP Unemployment rate
n
100
Laffer Curve

Tax
Rate
m m

Maximum revenue
0
l Tax Revenue

Laffer Curve…shows the relationship between tax rates and tax revenues
 Up to point m, higher tax rates will result in larger tax revenues. But still
higher tax rates will adversely affect incentives to work and produce, reducing the
size of the tax base and reducing tax revenues.
 Lower tax rates will lessen tax evasion and avoidance, and reduce government
transfer payments.
 i Sm Money Market…supply of money is a
% vertical line since monetary authorities
(FED) and financial institutions have
provided the economy with a certain stock
of money.
The Price axis is the rate of interest and $$
is the amount of money demanded at that
Dm rate.
$$ demanded

S
i%
Loanable Funds Money
Market… The Interest rate is
determined here . Fewer investment
i% projects will be undertaken when the
interest rate rises. More investment
D
projects will be undertaken when the
interest rate falls.

Q Q of loanable funds

Freely floating (flexible) exchange rates

S
The demand for any currency is $ Price of
downsloping because as the currency Foreign
becomes less expensive to obtain, people Currency
will be able to buy more of that nation’s
Goods & Services and therefore need more The intersection will be
of that currency. the exchange rate.
The supply is upsloping because as its price
rises, holders obtain more of their
currencies more cheaply and will want to
D
buy more important goods and therefore
give up more of their currency to obtain
other currencies. Quantity of Foreign Currency