The document presents several key graphs that are important for the AP Macroeconomics exam, including: 1) The production possibilities curve shows opportunity cost and inefficiency inside the curve, with efficiency on the curve. The curve shifts right with economic growth. 2) The aggregate demand/aggregate supply model shows equilibrium, recession with a recessionary gap, and inflation beyond full employment with an inflationary gap. 3) The money market graph shows how the Federal Reserve uses monetary policy to shift the money supply curve and change nominal interest rates. 4) The Phillips curve shows the short-run tradeoff between inflation and unemployment, and how it can shift due to supply shocks. In the long-run

1. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 GRAPHS 2 KNOW FOR THE AP MACRO EXAMINATION AP Macroeconomics 2010

2. PRODUCTION POSSIBILITIES Q 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Unattainable A B C W Attainable & Efficient D Robots (thousands) Attainable but Inefficient E Q 1 2 3 4 5 6 7 8 Pizzas (thousands) “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

3. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 Production Possibilities Curve Shows: Opportunity Cost: More pizzas means less robots Unemployment / Inefficiency: Inside the curve Efficiency: On the curve Economic Growth: Curve shifts to the right

4. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 AGGREGATE DEMAND / AGGREGATE SUPPLY P AS Equilibrium Real Output Price Level P AD Q Y Real Domestic Output, GDP

5. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 AS/AD: Recession (Recessionary Gap) Long Run Aggregate Supply (Full Employment) ASLR P AS Equilibrium Real Output Price Level P AD Q Y Real Domestic Output, GDP

6. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 AS/AD: Inflation: Beyond Full Employment (Inflationary Gap) Long Run Aggregate Supply (Full Employment) ASLR P AS Equilibrium Real Output P Price Level AD Q Y f Y 1 Real Domestic Output, GDP

7. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 INCREASES IN AD: DEMAND-PULL INFLATION P AS AD1 AD2 P2 Price Level P1 Q Y1 Yf Real Domestic Output, GDP

8. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 DECREASES IN AS: COST-PUSH INFLATION AS2 P AS1 P2 Price Level P1 AD1 Q Y1 Y 2 Real Domestic Output, GDP

10. Interest-Rate Effect

12. If Asset Demand for money increases, Dm Curve shifts to rightNOMINAL interest rate, i i Dm Quantity of Money

14. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 LOANABLE FUNDS MARKET S This graph shows how the supply and demand for loanable funds affects real interest rates! Real Interest Rate, r r D Q Quantity of Loanable Funds

15. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 Loanable Funds Market Graph(Long-Term Interest Rates) What changes Supply: Increase in Household savings Increase in Gov’t savings Increase in Business savings Increase in Business savings Increase in Foreigners’ savings What changes Demand: Increase in Household borrowing Increase in business Investment Increase in Foreign borrowing Increase in Government borrowing (When the gov’t has a budget deficit!) = (the crowding -out effect)

16. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 THE FOREIGN EXCHANGE MARKET The Market for Yen P Sy Dollar Price of a Yen Dy 0 Q Qe Quantity of Yen

17. THE FOREIGN EXCHANGE MARKET The Market for Yen P Sy 3 2 1 Dollar depreciates Dollar price of a Yen Dollar appreciates Dy Q Quantity of Yen “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

18. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 THE PHILLIPS CURVE CONCEPT 7 6 5 4 3 2 1 0 As inflation declines... Annual rate of inflation (percent) unemployment increases And vice versa! SRPC 1 2 3 4 5 6 7 Unemployment rate (percent)

19. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 THE PHILLIPS CURVE CONCEPT LRPC = Is the natural Rate of Unemployment 7 6 5 4 3 2 1 0 With Stagflation, Shift SRPC to the right With AD shift, move along existing SRPC Annual rate of inflation (percent) With AS shift, shift SRPC SRPC 2 SRPC 1 1 2 3 4 5 6 7 Unemployment rate (percent)

20. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 Phillips Curve Short run trade-off between inflation and unemployment. In the Long Run there is no trade off. The long run Phillips curve is Vertical! Stagflation (an increase in Unemployment and inflation) or an Aggregate Supply Shock will shift the SRPC to the right. Decreases in Inflation and Unemployment will shift the SRPC to the left. (and increase in AS would cause this)

21. TWO WAYS TO SHOW ECONOMIC GROWTH ASLR1 ASLR2 C A Price Level Capital Goods B D Q1 Q2 Consumer Goods Real GDP “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010

22. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 Causes of Economic Growth 1. Increased investments in Capital Stock. 2. Increased investments in Human Capital (education, training) and increases in quantity of human resources 3. New Technology leading to increased productivity 4. Increase in quantity and quality of natural resources

23. “Redelsheimer’s Graphs to Know” AP Macro Review Copyright 2010 Circular Flow Model $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES GOVERNMENT HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ CONSUMPTION $ REVENUE