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AP Macro Review #1

This will cover PPC, Supply and Demand, Money MArket, Loanable Funds Market, FOREX
by

Tammy Brown

on 2 April 2012

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Transcript of AP Macro Review #1

AP Macroeconomics Review Part 1
Production Possibilities Frontier
Shows Opportunity Cost
Absolute and Comparative Advantage
Capital
Consumer
measures potential output
inefficient
efficient
Impossible with current resources
United States
Sweden
Guns
Butter
1 mill guns or 100,00 butter
80,000 guns or 80,000 butter
1000
in thousands
80
100
80
absolute advantage: Who can absolutely make more guns? Butter?
comparative advantage: Whoever has the lowest opp cost should produce
US
1 gun=___ butter
1 butter =___ guns
Sweden
1 gun=___ butter
1 butter =___ guns
10
1
1
1/10th
Guns
Butter
in thousands
Terms of Trade: Somewhere in between
Practice at http://www.reffonomics.com
Supply and Demand
Loanable Funds Market
i
Q of $
Sm
Dm
Money Market
D
S
r
Q of LF
i
r
S= Fed
D= inversely related to nominal i%
Foreign Exhange Market
Changes in money demand are dependant on both the Price level and total spending level (GDP)
savers
borrowers
real interest rate accounts for expected inflation
nominal i= 10%
expected inflation=4%
real interest rate= 6%

$
Q of €
S €
D €

$
S $
D $
Q of $
e
q
e
q

$
Q of €
S €
D €

$
S $
D $
Q of $
e
q
e
q
e
2
q
2
S $
2
2
e
2
q
D €
2
Appreciation
Depreciation
a market where people buy and sell currency
Any thing that makes the supply of one currency increase will make the demand for the other currency increase, and vice versa
Always ask, where will the money flow?
Euro Market
Dollar Market
Growth
Relative GRITS
Real Interest Rates
direct
A high interest rate creates a high demand for the dollar. People from other countries want to purchase US financial assets.
Inflation
bad burrito (get rid of it)
Tastes
Speculation
betting on the above
a strong US dollar means that:
Americans can buy foreign goods more cheaply and U.S. imports will increase.
Americans can travel abroad less expensively.
Foreigners will find U.S. goods more expensive and exports will fall.
P
Q
S
D
Equilibrium
Investment Demand
ID
r
Q of I
r
r2
q
q2
LRAS
Pl
RGPD
SRAS
fy
full employment/ natural unemployment 4-6%
Remember RGDP = Output = Income
Full transcript