All the graphs (and some other stuff) you need to know for Macro

Correctly drawing and labeling graphs is critical in answering the free response
questions (FRQs) For an interacti!e lessons in the graphs go to
http"##wwwreffonomicscom#$html %here is a step by step re!iew of se!eral of the
important graphs
Graph: Things to remember:
Production Possibilities: $ %he cur!e represents full employment
& 'oints inside the cur!e are inefficient
( 'oints outside the cur!e are unattainable at this time
) %he cur!e can mo!e to the right when there are more or better
resources
* %rade+offs and opportunity costs can be determined from quantity
changes on the a,es
- .hifters"
a /ncreases in Resource .upplies (C011)
b Ad!ances in %echnology
c 'resent choices and future possibilities
Demand and Supply (Basic) $ Mo!ement on the cur!e happens from a change in price
& 2hen anything other than price changes3 you draw a new cur!e
( 4emand shifters
Change in buyer taste
Change in number of buyers
Change in income (normal or inferior goods)
Change in prices of related goods (substitutes and
complements)
Change in buyer e,pectations
) .upply shifters"
Change in resource prices
Change in technology
Change in ta,es or subsidies
Change in e,pectations
Change in the number of suppliers
Business Cycle $ 5ou always mo!e left to right on the graph 6 you can7t go backward
& At the peak the economy has the lowest le!els of unemployment and
the highest le!els of inflation
( /n the trough3 the economy has the highest le!els of unemployment
/nflation is not a problem
) An e,tended se!ere recession of - or more months can become a
depression
88.ome test writers call the recession a contraction and the reco!ery an
e,pansion
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>nattainable
/nefficient
Short Run ADAS $ 1abels on the a,es change to '1 and R?4' (or R4@)
& Cur!es are now A4 and .RA. (A.)
( 'rice is identified as '1 at each equilibrium le!el @n the A a,is3 use
the letter 5 to indicate the quantity amount
) Aggregate 4emand .hifters (changes in C/?An)"
Changes in Consumer spending caused by wealth3
e,pectations3 indebtedness3 or personal ta,es
Changes in in!estment spending caused by a change in
interest rates3 profit e,pectations3 business ta,es3 or e,cess
capacity
Changes in go!ernment spending
Changes in net e,port spending caused by a change in
national income abroad or e,change rates
* Aggregate .upply .hifters
Changes in input prices (changes in C011)
Changes in producti!ity
Changes in go!ernment policies such as business ta,es3
subsidies3 regulations
!oney !ar"et $ /ncreasing the money supply lowers interest rates as surplus
money mo!es into the bond market3 increasing bond prices
(increased demand for bonds)
& 4ecreasing the money supply increases interest rates as the
shortage of money creates a sell+off of bonds3 decreaseing
bond prices
( .ell bonds B smaller money supply # buy bonds B bigger
money supply
) .upply of money is always !ertical because the fed and does
not increase or decrease due to changes in the /R
* %otal demand for money is downsloping and responds to the
interest rate At lower rates3 people :@14 more money At
higher interest rates3 there is a greater incenti!e to mo!e cash
into forms of sa!ings
- %ransaction demand for money (also a !ertical line) is a
fraction of ?4'
= %he 4emand for money cur!e .:/F%. when there are
changes in ?4'
C %he .upply of money .:/F%. due to actions of the fed
#oanable $unds $ %he supply of loanable funds is from sa!ings
& %he demand of loanable funds comes from in!estment
( 0quilibrium is at the real interest rate where dollars sa!ed
equals dollars in!ested
) .hifters # 'olicies that influence the loanable funds market"
a %a,es and .a!ing (%a,es on sa!ings reduce the
incenti!e to sa!e A ta, decrease would alter the
incenti!e for households to sa!e at any given
interest rate and would affect the supply of loanable
funds )
b %a,es and /n!estment (A ta, Dreak on in!estment
would increase the incenti!e to borrow if an
in!estment ta, credit were gi!en)
c ?o!ernment Dudget 4eficits#.urpluses (2hen the
go!ernment borrows to finance its budget deficit3 it
reduces the supply of loanable funds a!ailable to
finance in!estment by households and firms %his
deficit borrowing Ecrowds outF the pri!ate borrowers
who are trying to finance in!estments)
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%n&estment Demand
.hifters"
a Acquisition3 maintenance and operating
costs
b Dusiness ta,es
c technological change
d stock of capital goods on hand
e e,pectations
$ A firm will in!est so long as the real profit is greater than or
equal to the real rate of interest
& As interest rates fall the amount of (quantity) of in!estments
rise
#ong Range Aggregate Supply $ Changes (shifters) in the long run supply are not caused by
changes in the price le!el 1RA. mo!es due to the same
reason as .RA. +++ this time it7s a more permanent situation
& %he long run is generally a year or greater time wise
( A change in 1RA. is the same as a rightward mo!e of the ''C
cur!e
) 'oints below the 1RA. indicate that the economy is not at full
employment and growth is still possible for R?4'
* 'oints abo!e full employment (1RA.) indicate an o!erheated
economy with inflationary problems
!ar"et 'or $oreign Currency (()change Rates)

$ @ther countries want > . goods when"
a @urs are cheaper
b @ur inflation is less that theirs
c @ur interest rate is higher
d %he other country is growing faster
& %hese cause the dollar to A''R0C/A%0
( %he G depreciates when the opposite e!ents occur
) %hink of dollars as a commodity with a simple supply#demand
cur!e
RememberH.et the 5 a,is up like a fraction %he currency that is the
denominator is the currency on the A a,is %he e,change rate is the cost
of the other country7s currency to one for the country in the graph %he
quantity is the number that will be demanded and supplied in the world
market at that EpriceF
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88/n a more
complicated
graph3 EdragF
the new
cur!es along
with the new
1RA. for
reading ease
Phillips Cur&e (SRPC)
Phillips Cur&e (#RPC)
$ >nder normal circumstances3 there is a short+run tradeoff
between the rate of inflation and the rate of unemployment
& Aggregate supply shocks can cause both higher rates of
unemployment (a rightward shift of the cur!e)
( %here is no significant tradeoff between inflation and
unemployment o!er long periods of time
) .tagflation is simultaneous high inflation and high
unemployment
* After all nominal wage adIustments to increases and
decreases in the rate of inflation ha!e occurred3 the economy
ends up back at its full+employment le!el of output and its
natural rate of unemployment
- %he long+run 'hillips Cur!e therefore is !ertical at the natural
rate of unemployment
= @ther .hifters"
a* Changes in the labor 'orce characteristics Age3 se,3
number of married both employed couples3 number of new
workers entering the labor force3 structural changes in demand
for labor skills3 educational attainment le!el of the workers or
requirements of the Iobs
b* Changes o' go&ernment policies Minimum wage3
unemployment compensation3 Iob training programs3
employment subsidies to workers or the employers
c Changes in Producti&ity /ncreases in producti!ity w#o
wage increases makes workers more desirable3 and slowing of
producti!ity w#o a corresponding slowing of wage increases
makes workers less desirable
d* Changes in #abor !ar"et %nstitutions. 'ower of labor
unions to negotiate wages abo!e equilibrium le!el3 number of
and efficiency of temporary employment agencies3 the efficacy
of the internet for Iob searches
#a''er Cur&e
+R
$ %his graph can be drawn with the labels on either a,is
& t8 represents the rate of ta,ation at which ma,imal re!enue is
generated Jote" %his diagram is not to scaleK t8 could
theoretically be anywhere3 not necessarily in the !icinity of *<L
as shown here
( %he theory is based on the notion that go!ernment collects
Mero re!enue if the ta, rate is <L and if the ta, rate is $<<L At
a $<<L ta, rate no one has the incenti!e to work3 produce3
and earn income3 so there is no income to ta, As such3 the
optimum ta, rate3 in which go!ernment re!enue is ma,imiMed3
lies somewhere between <L and $<<L
) /f the economy is operating to the right of the peak3 then
go!ernment re!enue can be increased by decreasing the ta,
rate %his was used to Iustify supply+side economic policies
during the Reagan Administration3 especially the 0conomic
Reco!ery %a, Act of $NC$ (Oemp+Roth Act)
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+ther Reminders,
!onetary Policy
%' the problem is * * *
-nemployment %n'lation
. .
Then the $ederal Reser&e uses * * *
Tools ()pansion Contraction
+!+ Duys bonds .ells bonds
Reser&e
Re/uireme
nt
4ecrease /ncrease
Discount
Rate
4ecrease /ncrease
+!+ (+pen !ar"et +perations) is the 01 tool o' the
$ederal Reser&e,
$iscal Policy (2 a''ects short run Aggregate Demand) )
%' the problem is * * *
-nemployment %n'lation
. .
Then Congress uses * * * *

Tools ()pansion Contraction
Ta)es3T
4ecrease /ncrease
Subsidies
/ncrease 4ecrease
Spending3G
/ncrease 4ecrease
.upply .ide Fiscal 'olicy is general a ta, reduction targeted
to increase A. so that real ?4' increases with !ery little
inflation An increase is A. is the best of all possible
macroeconomic situations
$ormulas
?4' B Consumption P /n!estment P ?o!ernment .pending P Jet 0,ports
M'C B QC#Q4/ B slope of consumption function
M'.B Q.#Q4/B slope of sa!ing function
M'C P M'. B $
.pending Multipliers"
$#$+M'C B $#M'.B (Q?4')#( Q .pending)
%a, Multiplier
M'C#M'.
Dalanced Dudget Multiplier (equal changes in ta,es and go!ernment spending) B $
.imple Money Multiplier"
$#RR
Money 0,pansion B Money multiplier A 0,cess Reser!es
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