Models in AP Economics Sally Meek Sally [email protected].

Models inModels in AP Economics AP Economics

Sally MeekSally Meek

[email protected]@pisd.edu

Models inModels in AP Macroeconomics AP Macroeconomics

Let’s focus on modelsLet’s focus on models

Directions for FRQ’s include: …….Directions for FRQ’s include: …….

… … it is not enough to list the results of your it is not enough to list the results of your analysis. analysis. Include correctly labeled diagrams, if Include correctly labeled diagrams, if useful or required, in explaining your useful or required, in explaining your answers. answers.

A correctly labeled diagram must have all A correctly labeled diagram must have all axes and curves clearly labeled axes and curves clearly labeled and must show and must show directional changes. Use a pen with black or dark directional changes. Use a pen with black or dark blue ink.blue ink.

Macroeconomics Macroeconomics Key Graphs Key Graphs

Production Possibilities FrontierProduction Possibilities Frontier

(opportunity cost, economic growth, trade)(opportunity cost, economic growth, trade)

Circular Flow ModelCircular Flow Model (National Income Accounting)National Income Accounting)

Market Supply and DemandMarket Supply and Demand (foreign exchange markets)foreign exchange markets)

Macroeconomics Macroeconomics Key Graphs Key Graphs

•Aggregate Supply and Demand, Aggregate Supply and Demand, Including LRASIncluding LRAS

(monetary policy, fiscal policy, market self (monetary policy, fiscal policy, market self regulation)regulation)

•Investment demandInvestment demand

•Money MarketMoney Market (monetary policy)(monetary policy)

Macroeconomics Macroeconomics Key Graphs Key Graphs

Loanable funds marketLoanable funds market (fiscal policy)(fiscal policy)

Phillips Curve – short run and long runPhillips Curve – short run and long run

Production Possibility FrontierProduction Possibility Frontier

Good X

Good Y

Good X

Good Y

Increasing opportunity costs Constant opportunity costs

Using PPFs and comparative Using PPFs and comparative advantageadvantage

Radios Radios

Wheat Wheat

3

12

2

4

Using PPFs and CPFsUsing PPFs and CPFs

Assume they tradeAssume they trade 1 r for 3 w1 r for 3 w

Radios Radios

Wheat Wheat

3

12

2

4 6

4

Circular Flow ModelCircular Flow Model

HouseholdsHouseholds FirmsFirms

Resource MarketResource Market

Product MarketProduct Market

Land, labor, capital. entrepreneurial abilityLand, labor, capital. entrepreneurial ability

Rent, wages, interest, profitsRent, wages, interest, profits

Goods and servicesGoods and services

Consumption expendituresConsumption expenditures

GovernmentGovernmentNet taxesNet taxes Net taxesNet taxes

Public goods and servicesPublic goods and services Public goods and servicesPublic goods and services

Perfectly Competitive MarketPerfectly Competitive Market

P

Q

S

D

P1

Q1

Non-price determinantsNon-price determinants

DemandDemand

Changes inChanges 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 substitutescomplements or substitutes

SupplySupply

Changes inChanges 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

$/Yen$/YenYen/$Yen/$

USDUSDYenYen

D$D$

S$S$

DYenDYen

SYenSYen

D$1D$1 SYen1SYen1

Currency Markets Currency Markets Supply and DemandSupply and Demand

Determinants of Exchange RatesDeterminants of Exchange Rates

Changes in any of the following:Changes in any of the following:

◦Relative real interest ratesRelative real interest rates◦Relative price levelsRelative price levels◦Relative national incomeRelative national income◦Taste for importsTaste for imports◦SpeculationSpeculation

Aggregate Supply and Aggregate Supply and DemandDemand

PLPL

RGDPRGDP

LRASLRAS

YfYf

SRASSRAS

AD=C+Ig+G+XnAD=C+Ig+G+Xn

PL1PL1

DeterminantsDeterminants

LRASLRAS – changes in technology, – changes in technology, productivity, and the quantity or quality of productivity, and the quantity or quality of land, labor, capitalland, labor, capital

SRASSRAS – changes in input costs and – changes in input costs and inflation expectationsinflation expectations

ADAD – changes in personal consumption – changes in personal consumption spending, gross private domestic spending, gross private domestic investment, government purchases and investment, government purchases and net exportsnet exports

Investment DemandInvestment Demand

RIRRIR

((As As compared compared to the to the expected expected rate of rate of return)return)

QQ

IDID

•As RIR changes the quantity ofAs RIR changes the quantity ofInvestment demanded changesInvestment demanded changes

•Other determinants shift the ID curve:Other determinants shift the ID curve:• costs of capitalcosts of capital•business taxesbusiness taxes•TechnologyTechnology•expectationsexpectations

Money MarketMoney Market

NIRNIR

Q1Q1QQ

MDMD

MSMS

ii11

•MSMS – affected by actions of the – affected by actions of the Federal ReserveFederal Reserve

•MD MD – – •Transaction demand Transaction demand determined by GDPdetermined by GDP•Asset demandAsset demand determined by NIR determined by NIR

Loanable Funds MarketLoanable Funds Market

RIRRIR

QQ

D LFD LF

S LFS LF

r1r1

Q1Q1

•Supply of Loanable FundsSupply of Loanable Funds:: personal savings and personal savings and financial capital fromfinancial capital from abroadabroad•Demand for Loanable FundsDemand for Loanable Funds:: firms demand for funds forfirms demand for funds for capital and interest capital and interest sensitive consumptionsensitive consumption

Phillips Curve – LR and SRPhillips 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)