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Models in AP Economics. Sally Meek Sally.meek@pisd.edu. Models in AP Macroeconomics. Let’s focus on models Directions for FRQ’s include: …….

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models in ap economics

Models in AP Economics

Sally Meek

Sally.meek@pisd.edu

slide3

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

(opportunity cost, economic growth, trade)

  • Circular Flow Model

(National Income Accounting)

  • Market Supply and Demand

(foreign exchange markets)

Macroeconomics Key Graphs
macroeconomics key graphs1

Aggregate Supply and Demand,

  • Including LRAS
  • (monetary policy, fiscal policy, market self regulation)
  • Investment demand
  • Money Market
  • (monetary policy)
Macroeconomics Key Graphs
macroeconomics key graphs2
Loanable funds market

(fiscal policy)

  • Phillips Curve – short run and long run
Macroeconomics Key Graphs
production possibility frontier

Increasing opportunity costs

Constant opportunity costs

Good X

Good X

Good Y

Good Y

Production Possibility Frontier
using ppfs and cpfs
Assume they trade

1 r for 3 w

Radios

4

Radios

3

2

12

4

6

Wheat

Wheat

Using PPFs and CPFs
circular flow model

Product Market

Consumption expenditures

Goods and services

Net taxes

Net taxes

Government

Firms

Households

Public goods and services

Public goods and services

Land, labor, capital. entrepreneurial ability

Rent, wages, interest, profits

Resource Market

Circular Flow Model
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
Non-price determinants
slide13

S$

Yen/$

$/Yen

SYen

D$1

SYen1

D$

DYen

USD

Yen

Currency Markets

Supply and Demand

determinants of exchange rates
Changes in any of the following:
    • Relative real interest rates
    • Relative price levels
    • Relative national income
    • Taste for imports
    • Speculation
Determinants of Exchange Rates
aggregate supply and demand

LRAS

PL

SRAS

PL1

AD=C+Ig+G+Xn

Yf

RGDP

Aggregate Supply and Demand
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
Determinants
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

Investment Demand
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

Money Market
slide19

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

slide20

LRPC

Inflation rate

4%

2%

SRPC (assumes 4 % expected inflation at each UR)

SRPC (assumes 2% expected inflation at each UR)

Natural rate

of

unemployment

Unemployment

rate

Phillips Curve – LR and SR

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