Models in AP Economics

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Models in AP Economics
Sally Meek Sally.meek_at_pisd.edu
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Models in AP Macroeconomics
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Lets focus on models Directions for FRQs
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.
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Macroeconomics Key Graphs

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

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Macroeconomics Key Graphs

• Aggregate Supply and Demand,
• Including LRAS
• (monetary policy, fiscal
  policy, market self regulation)
• Investment demand
• Money Market
  
• (monetary policy)

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Macroeconomics Key Graphs

• Loanable funds market
• (fiscal policy)
• Phillips Curve short run and long run

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Production Possibility Frontier
Increasing opportunity costs
Constant opportunity costs
Good X
Good X
Good Y
Good Y
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Using PPFs and comparative advantage
Radios
Radios
3
2
12
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Wheat
Wheat
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Using PPFs and CPFs

• Assume they trade
• 1 r for 3 w

Radios
Radios
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3
2
12
4
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Wheat
Wheat
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Circular Flow Model
Product Market
Consumption expenditures

Goods and services

Net taxes
Net taxes
Firms
Government
Households
Public goods and services
Public goods and services
Land, labor, capital. entrepreneurial ability
Rent, wages, interest, profits
Resource Market
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Perfectly Competitive Market
P
S
P1
D
Q
Q1
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Non-price determinants

• Demand
• Changes in
• Taste and preference
• Income
• Marketsize ( of buyers)
• Consumer expectations
• Price of related goods
• complements or substitutes

• Supply
• Changes in
• Resource prices
• Technology
• Number of sellers
• Producer expectations
• Taxes and subsidies
• Price of alternative goods

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S
Yen/
/Yen
SYen
D1
SYen1
D
DYen
USD
Yen
Currency Markets Supply and Demand
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Determinants of Exchange Rates

• Changes in any of the following
• Relative real interest rates
• Relative price levels
• Relative national income
• Taste for imports
• Speculation

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Aggregate Supply and Demand
LRAS
PL
SRAS
PL1
ADCIgGXn
RGDP
Yf
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Determinants

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

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Investment Demand
RIR (As compared to the expected rate of return)

• As RIR changes the quantity of
• Investment demanded changes
• Other determinants shift the ID curve
• costs of capital
• business taxes
• Technology
• expectations

ID
Q
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Money Market
MS
NIR

• MS affected by actions of the
• Federal Reserve
• MD
• Transaction demand
• determined by GDP
• Asset demand
• determined by NIR

i1
MD
Q1
Q
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RIR

• Supply of Loanable Funds
• personal savings and
• financial capital from
• abroad
• Demand for Loanable Funds
• firms demand for funds for
• capital and interest
• sensitive consumption

S LF
r1
D LF
Q1
Q
Loanable Funds Market
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LRPC
Inflation rate
4
SRPC (assumes 4 expected inflation at each UR)
2
SRPC (assumes 2 expected inflation at each UR)
Unemployment rate
Natural rate of unemployment
Phillips Curve LR and SR