AP Macro Graphs and their Properties

Point inside the PPC

Inefficient use of resources (underemployment or unemployment).

Point outside the PPC

Unattainable due to scarcity (requires more/better resources or trade).

Concave (bowed out) PPC

Shows increasing opportunity costs because resources are not perfectly adaptable.

PPC outward shift

Caused by an increase in resource quality/quantity or technological improvement.

PPC inward shift

Caused by a decrease in resource quality/quantity.

Circular Flow – product market flow (households → businesses)

Money (sales/revenue) in exchange for goods and services.

Circular Flow – factor market flow (businesses → households)

Income (wages, rent, interest, profit) in exchange for resources.

Inflationary gap (Business Cycle graph)

When actual output exceeds potential output (at a peak).

Recessionary gap (Business Cycle graph)

When actual output is less than potential output (at a trough).

LRAS curve

Vertical line representing full employment output (potential GDP) at any price level.

AD curve shifters

Changes in C, Ig, G, or Xn (components of GDP).

SRAS curve shifters

Changes in productivity, input costs, or supply shocks.

Inflationary gap (AS/AD model)

When equilibrium output > full employment output (Ye > Yf).

Recessionary gap (AS/AD model)

When equilibrium output < full employment output (Ye < Yf).

Money Market graph Y-axis (scarce reserves)

Nominal interest rate.

Money Supply (MS) curve

Represents the amount of money in the economy (M1 or M2), controlled by the central bank.

Money Demand (MD) curve shifters

Changes in transactions (GDP) or desire to hold cash as an asset.

Loanable Funds Market Y-axis

Real interest rate.

Supply of loanable funds shifters

Changes in savings or foreign investment.

Demand for loanable funds shifters

Changes in expected rate of return on investments.

Short-run Phillips curve (SRPC)

Shows an inverse relationship between inflation and unemployment.

Long-run Phillips curve (LRPC)

Vertical line at the natural rate of unemployment at any inflation rate.

SRPC shifters

Supply shocks or changes in inflation expectations.

Intersection of SRPC and LRPC

Represents the expected inflation rate and natural rate of unemployment (long-run equilibrium).

Foreign Exchange Market Y-axis

Price of one currency in terms of another (exchange rate).

Demand for a currency shifters

Changes in interest rates, expected exchange rates, or foreign demand for exports.

Supply of a currency shifters

Opposite of demand shifts: changes in interest rates abroad, expected exchange rates, or demand for imports.

Reserves Market graph

Illustrates the market for bank reserves in an ample reserves system (used by the Fed).

Administered rates (reserves market)

Discount rate (upper bound) and interest on reserves (lower bound).

Aggregate Production Function graph

Shows the relationship between employment (or capital per worker) and real GDP.

Aggregate Production Function upward shift

Caused by increases in productivity, technology, or human capital.

Production Possibilities Frontier/Curve

A graphical representation that illustrates the maximum attainable combinations of two goods or services that can be produced with available resources and technology. It shows trade-offs and opportunity costs.

Demand and Supply

The economic model that describes how the quantity of goods demanded by consumers and the quantity supplied by producers determine the market price and quantity of goods sold.

Loanable Funds Market

The market where borrowers seek funds and lenders supply funds, influencing interest rates and overall investment in the economy.

Money Market (Scarce Reserves System)

A segment of the financial market where short-term borrowing and lending of funds occurs, typically involving instruments like Treasury bills, commercial paper, and certificates of deposit. It plays a key role in managing liquidity and interest rates in the economy.

Phillips Curve

A graphical representation of the inverse relationship between unemployment and inflation, suggesting that lower unemployment leads to higher inflation.

Foreign Exchange Market

The market where currencies are traded against each other, determining exchange rates and facilitating international trade and investment.

Business Cycle

The natural rise and fall of economic growth that occurs over time, characterized by periods of expansion and contraction in GDP.

Reserves Market (Ample Reserves System)

A system in which banks hold a substantial amount of reserves, leading to stability in the money supply and interest rates. It allows for efficient liquidity management and enhances the central bank's ability to control monetary policy.

Aggregate Production Function

A mathematical representation that shows the relationship between the total output of goods and services and the quantity of labor and capital used in production.