ELITE EIGHT MACROECONOMICS GRAPHS
The following eight graphs are the typical graphs used to interpret economic situations for the AP
Macroeconomic course.
Production Possibilities Curve (PPC)
Determinants (Shifters) of PPC
permanent change in land, labor, capital, entrepreneurial ability
Supply and Demand Graph
Determinants (Shifters) of Demand:
Number of Consumers
Consumer Tastes and Preferences
Consumer Income/Wealth
Price of Substitute Goods
Price of Complementary Goods
Consumer Expectations
Determinants (Shifters) of Supply:
Number of Producers
Input Costs
Price of Alternative Goods
Producer Expectations
Review Formulas:
D↑ → P↑, Q↑
D↓ → P↓, Q↓
S↑ → P↓, Q↑
S↓ → P↑, Q↓
Circular Flow Diagram
Aggregate Demand-Aggregate Supply (AD/AS)
Determinants of Aggregate Demand (AD):
C + I + G + Xn
Consumption/Consumer Spending (C)
- consumer income/wealth
- consumer confidence
- income taxes
- interest rates
Investment Spending (I)
- acquisition/maintenance/operating costs
- business taxes
- technology
- inventory
- interest rates
Government Spending (G)
- Expansionary Fiscal Policy
- Contractionary Fiscal Policy
Net Exports (Xn)/Exports - Imports (X-M)
- relative income
- exchange rates
- foreign consumer tastes/preferences
- protectionism (tariffs, quotas)
Determinants of Short-Run Aggregate Supply (SRAS):
Input Costs
Wages
Productivity
Producer Expectations
Government Subsidies
Business Taxes
Government Regulations
Determinants of Long-Run Aggregate Supply (LRAS):
Permanent change in...
Land
Labor
Capital
Entrepreneurial Ability
Review Formulas:
Consumption (C) and Saving (S)
Consumer Wealth↑ → C↑, S↓
Consumer Wealth↓ → C↓, S↑
Consumer Expectations↑ → C↑, S↓
Consumer Expectations↓ → C↓, S↑
Consumer Debt↑ → C↓, S↑
Consumer Debt↓ → C↑, S↓
Income Taxes↑ → C↓, S↓
Income Taxes↓ → C↑, S↑
Transfer Payments↑ → C↑, S↑
Transfer Payments↓ → C↓, S↓
Investment Spending/Demand (I)
Acquisition/Maintenance/Operating Costs↑ → I↓
Acquisition/Maintenance/Operating Costs↓ → I↑
Business Taxes↑ → I↓
Business Taxes↓ → I↑
Technology↑ → I↑
Technology↓ → I↓
Inventory↑ → I↓
Inventory↓ → I↑
Market Expectations↑ → I↑
Market Expectations↓ → I↓
Fiscal Policy
Expansionary Fiscal Policy (increase government spending, decrease taxes) → AD↑ → PL↑, Y↑
Contractionary Fiscal Policy (decrease government spending, increase taxes) → AD↓ → PL↓, Y↓
Net Exports (Xn)/Exports - Imports (X-M)
Foreign Consumer Tastes and Preferences↑ → Xn↑
Foreign Consumer Tastes and Preferences↓ → Xn↓
Foreign Income↑ → Xn↑
Foreign Income↓ → Xn↓
Appreciation of Dollar ($↑) → Xn↓
Depreciation of Dollar ($↓) → Xn↑
Tariffs↑ → M↓ → Xn↑
Tariffs↓ → M↑ → Xn↓
Aggregate Demand (AD)
C↑, I↑, G↑, Xn↑ → AD↑ → PL↑, Y↑ (Demand-Pull Inflation)
C↓, I↓, G↓, Xn↓ → AD↑ → PL↓, Y↓
Short-Run Aggregate Supply (SRAS)
SRAS↑ → PL↓, Y↑
SRAS↓ → PL↑, Y↓ (Cost-Push Inflation aka Stagflation)
Long-Run Aggregate Supply (LRAS)
Land↑, Labor↑, Capital↑, Entrepreneurial Ability↑ → LRAS↑
Land↓, Labor↓, Capital↓, Entrepreneurial Ability↓ → LRAS↓
Loanable Funds
Determinants of Demand for Loanable Funds:
Consumer Borrowing
Investment Spending
Government Deficit Spending*
Determinants of Supply of Loanable Funds:
Savings
Money Supply
Government Deficit Spending*

- Deficit spending can be applied to either the Supply of Loanable Funds or the Demand of Loanable
Funds. Either way is correct as both result in the increase of real interest rates. In my course, I instruct
you to apply deficit spending to the Demand of Loanable Funds. KEY IDEA: Increased deficit spending
results in Crowding Out.
Review Formulas:
Demand for Loanable Funds
(borrowing↑; deficit spending↑) → Dlf↑ → r%↑, Qlf↑
(borrowing↓; deficit spending↓) → Dlf↓ → r%↓, Qlf↓
Supply of Loanable Funds
(savings↑; money supply↑) → Slf↑ → r%↓, Qlf↑
(savings↓; money supply↓) → Slf↓ → r%↑, Qlf↓
Phillips Curve
Review Formulas
AD↑ → moving along SRPC right to left
AD↓ → moving along SRPC left to right
SRAS↑ → SRPC↓
SRAS↓ → SRPC↑
LRAS↑ → LRPC↓
LRAS↓ → LRPC↑
Money Market
Tools of the Federal Reserve (3)
1. Open-Market Operations
Buy Bonds → MS↑ (targets lower federal funds rate)
Sell Bonds → MS↓ (targets higher federal funds rate)
2. Discount Rate
Discount Rate↓ → MS↑
Discount Rate↑ → MS↓
3. Required Reserve Ratio/Reserve Requirement
Reserve Requirement↓ → MS↑
Reserve Requirement↑ → MS↓
Determinants of Money Demand:
Price Level
Real GDP/real income
Determinants of Money Supply:
Federal Reserve's Expansionary Monetary Policy (buy bonds, decrease the discount rate, and/or
decrease the reserve requirement)
Federal Reserve's Contractionary Monetary Policy (sell bonds, increase the discount rate, and/or
increase the reserve requirement)
Review Formulas:
Money Demand (MD)
PL↑ → MD↑ → i%↑, Q↑
PL↓ → MD↓ → i%↓, Q↓
Y↑ → MD↑ → i%↑, Q↑
Y↓ → MD↓ → i%↓, Q↓
Money Supply (MS)
Expansionary Monetary Policy (buy bonds, decrease the discount rate, and/or decrease the reserve
requirement) → MS↑ → i%↓, Q↑
Contractionary Monetary Policy (sell bonds, increase the discount rate, and/or increase the reserve
requirement) → MS↓ → i%↑, Q↓
Foreign Exchange (FOREX)
Determinants of Exchange Rates:
T - tastes and preferences
I - relative income
P - relative price level
S - speculation
I - relative interest rates
Review Formulas:
Y↑ → S$↑, D$↓ → $↓ (U.S. Dollar depreciates)
Y↓ → S$↓, D$↑ → $↑ (U.S. Dollar appreciates)
PL↑ → S$↑, D$↓ → $↓ (U.S. Dollar depreciates)
PL↓ → S$↓, D$↑ → $↑ (U.S. Dollar appreciates)
i%↑ → S$↓, D$↑ → $↑ (U.S. Dollar appreciates)
i%↓ → S$↑, D$↓ → $↓ (U.S. Dollar depreciates)
MACROECONOMIC MEASUREMENTS, MULTIPLIERS, AND OTHER MACRO
FORMULAS
GROSS DOMESTIC PRODUCT (GDP)
Expenditures Approach: C + I + G + Xn
Income Approach: Wages + Rent + Interest + Profit
Nominal GDP = Real GDP x GDP Deflator (price index)
Real GDP = (Nominal GDP / GDP Deflator) x 100
GDP Deflator = (Nominal GDP / Real GDP) x 100
GDP Growth Rate = [(GDPnew - GDPold) / GDPold] x 100
GDP per Capita = Real GDP / population
INFLATION
Consumer Price Index (CPI) = (current price / base price) x 100
Inflation Rate = [(CPInew - CPIold) / CPIold] x 100
UNEMPLOYMENT
Unemployment Rate = (# of unemployed / # in the labor force) x 100
Labor Force Participation Rate = (# in the labor force / population) x 100
FISHER'S HYPOTHESIS
Nominal Interest Rate = Real Interest Rate + Expected Rate of Inflation
MARGINAL PROPENSITY TO CONSUMER (MPC)
∆C/∆DI
MARGINAL PROPENSITY TO SAVE (MPS)
∆S/∆DI
MPC + MPS = 1
SPENDING MULTIPLIER
1/MPS
∆GDP/∆Spending
TAX MULTIPLER
-MPC/MPS
∆GDP/∆Taxes
SPENDING/TAX MULTIPLIER CHART
MPC Spending Multiplier Tax Multiplier
0.90 10
-9
0.80 5
-4
0.75 4
-3
0.67 3
-2
0.50 2
-1
BALANCED-BUDGET MULTIPLIER = 1
MONEY MULTIPLIER
rr = Reserve Requirement/Ratio
Money Multiplier = 1/rr
MONEY MULTIPLIER CHART
rr
Money Multiplier
0.05 20
0.10 10
0.20 5
0.25 4
0.50 2
TIME VALUE OF MONEY/PURCHASING POWER OF MONEY
r = real interest rate
Future Value (FV) = Present Value (PV) x (1 + r)
Present Value (PV) = Future Value / (1+r)
EQUATION OF EXCHANGE
M = Money Supply
V = Velocity of Money
P = Price Level
Y = Real GDP
MV = PY
BALANCE OF PAYMENTS
CURRENT ACCOUNT
Net Exports (Balance of Trade)
Exports (goods/services) - inflow (+)
Imports (goods/services) - outflow (-)
Net Investment Income
Profits/Wages/Interest/Dividends Earned on Foreign Investments - inflow (+)
Profits/Wages/Interest/Dividends Paid to Foreign Firms - outflow (-)
Net Transfers
Foreign Public/Private Transfers to Domestic - inflow (+)
Domestic Public/Private Transfers to Foreign - outflow (-)
FINANCIAL (CAPITAL) ACCOUNT
Direct Investment
Foreign Purchase of Domestic Real Assets - inflow (+)
Domestic Purchase of Foreign Real Assets - outflow (-)
Foreign Purchase of Domestic Financial Assets - inflow (+)
Domestic Purchase of Foreign Financial Assets - outflow (-)
Other Investment
Foreign Interest-Earning Account in Domestic Bank - inflow (+)
Domestic Interest Earning Account in Foreign Bank - outflow (-)
Foreign Loan to Domestic Borrower - inflow (+)
Domestic Loan to Foreign Borrower - outflow (-)
CURRENT ACCOUNT + FINANCIAL (CAPITAL) ACCOUNT = 0
OFFICIAL RESERVES
Federal Reserve (central bank) steps in if...
Balance of Payment Deficit
Balance of Payment Surplus