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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
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)
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
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