Models in AP Economics Sally Meek Sally

Models in AP Macroeconomics

Let’s focus on models Directions for FRQ’s include: ……. … it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink.

Macroeconomics Key Graphs Production Possibilities Frontier Production Possibilities Frontier (opportunity cost, economic growth, trade) (opportunity cost, economic growth, trade) Circular Flow Model Circular Flow Model National Income Accounting) (National Income Accounting) Market Supply and Demand Market Supply and Demand foreign exchange markets) (foreign exchange markets)

Macroeconomics Key Graphs Aggregate Supply and Demand,Aggregate Supply and Demand, Including LRAS Including LRAS (monetary policy, fiscal policy, market self regulation) Investment demandInvestment demand Money MarketMoney Market (monetary policy)

Macroeconomics Key Graphs Loanable funds market Loanable funds market (fiscal policy) Phillips Curve – short run and long run Phillips Curve – short run and long run

Production Possibility Frontier Good X Good Y Good X Good Y Increasing opportunity costsConstant opportunity costs

Using PPFs and comparative advantage Radios Wheat

Using PPFs and CPFs Assume they trade 1 r for 3 w 1 r for 3 w Radios Wheat

Circular Flow Model Households Firms Resource Market Product Market Land, labor, capital. entrepreneurial ability Rent, wages, interest, profits Goods and services Consumption expenditures Government Net taxes Public goods and services

Perfectly Competitive Market P Q S D P1 Q1

Non-price determinants Demand Demand Changes in : Taste and preferenceTaste and preference IncomeIncome Marketsize (# of buyers)Marketsize (# of buyers) Consumer expectationsConsumer expectations Price of related goodsPrice of related goods complements or substitutes complements or substitutes Supply Changes in : Resource pricesResource prices TechnologyTechnology Number of sellersNumber of sellers Producer expectationsProducer expectations Taxes and subsidiesTaxes and subsidies Price of alternative goodsPrice of alternative goods

$/Yen Yen/$ USD Yen D$ S$ DYen SYen D$1 SYen1 Currency Markets Supply and Demand

Determinants of Exchange Rates Changes in any of the following: Changes in any of the following: ◦Relative real interest rates ◦Relative price levels ◦Relative national income ◦Taste for imports ◦Speculation

Aggregate Supply and Demand PL RGDP LRAS Yf SRAS AD=C+Ig+G+Xn PL1

Determinants LRAS – changes in technology, productivity, and the quantity or quality of land, labor, capital LRAS – changes in technology, productivity, and the quantity or quality of land, labor, capital SRAS – changes in input costs and inflation expectations SRAS – changes in input costs and inflation expectations AD – changes in personal consumption spending, gross private domestic investment, government purchases and net exports AD – changes in personal consumption spending, gross private domestic investment, government purchases and net exports

Investment Demand RIR (As compared to the expected rate of return) Q ID As RIR changes the quantity ofAs RIR changes the quantity of Investment demanded changes Other determinants shift the ID curve:Other determinants shift the ID curve: costs of capital costs of capital business taxesbusiness taxes TechnologyTechnology expectationsexpectations

Money Market NIR Q1 Q MD MS i1i1i1i1 MS – affected by actions of theMS – affected by actions of the Federal Reserve Federal Reserve MD –MD – Transaction demandTransaction demand determined by GDP determined by GDP Asset demandAsset demand determined by NIR determined by NIR

Loanable Funds Market RIR Q D LF S LF r1 Q1 Supply of Loanable Funds:Supply of Loanable Funds: personal savings and personal savings and financial capital from financial capital from abroad abroad Demand for Loanable Funds:Demand for Loanable Funds: firms demand for funds for firms demand for funds for capital and interest capital and interest sensitive consumption sensitive consumption

Phillips Curve – LR and SR Inflation rate LRPC Unemployment rate SRPC (assumes 4 % expected inflation at each UR) Natural rate of unemployment 2% 4% SRPC (assumes 2% expected inflation at each UR)