Every Graph to Know for AP Macroeconomics

1) What You Need to Know

AP Macro loves graphs because they let you predict direction (up/down) for the “big 6”: $Y$ (real GDP/output), $PL$ (price level/inflation), $u$ (unemployment), $i$ (interest rate), $e$ (exchange rate), and net exports $NX$. Your job on the exam is usually to:

• Pick the right model (graph)
• Shift the correct curve
• Read the new equilibrium
• Translate the graph into macro outcomes

The “must-know” graph set

If you can draw + shift these cleanly, you’re in great shape:

1. PPF/PPC (Production Possibilities Curve)
2. AD–AS (Aggregate Demand / Aggregate Supply) with LRAS + gaps
3. Keynesian Cross / Aggregate Expenditure (AE) model
4. Money Market (Liquidity Preference)
5. Loanable Funds Market
6. Foreign Exchange (FOREX) Market
7. Phillips Curve (short-run + long-run)
8. Lorenz Curve (income distribution; shows up less, but easy points)

Critical reminder: In almost every graph question, you earn points for (1) correct shift, (2) correct new equilibrium labels, (3) correct direction-of-change statements.

2) Step-by-Step Breakdown (How to Attack Any Graph Question)

Use this every time, especially on FRQs.

1. Identify the model and the “price” on the y-axis

   • AD–AS: y-axis is $PL$
   • Money market: y-axis is $i$
   • Loanable funds: y-axis is real $r$ (often written as $i$ on AP, but conceptually real)
   • FOREX: y-axis is exchange rate (be explicit: $\text{USD per unit of foreign currency}$ or the reverse)
   • Keynesian cross: y-axis is AE, x-axis is real $Y$

2. Classify the shock: demand-side or supply-side (for AD–AS)

   • Demand-side: consumption, investment, government spending, taxes, net exports, money/interest-rate channel
   • Supply-side: input prices (oil), productivity, expectations, regulations

3. Shift ONE curve first (don’t “double shift” unless asked)

   • Example: Expansionary fiscal policy shifts AD right, not SRAS.

4. Find the new equilibrium (intersection) and label changes

   • Always show old and new equilibria with arrows.

5. Translate to the “big 6”

   • AD right usually: $Y\uparrow$, $PL\uparrow$, $u\downarrow$
   • SRAS left usually: $Y\downarrow$, $PL\uparrow$ (stagflation), $u\uparrow$

6. Connect models when needed (common FRQ chain)

   • Policy → Money Market (changes $i$) → **Investment** → **AD** → $Y$ and $PL$ → Phillips (inflation/unemployment) → possibly FOREX/NX

Micro-worked chain (classic FRQ)

The Fed buys bonds (open market purchase).

1. Money market: $M_S\uparrow$ → $i\downarrow$
2. Investment: cheaper borrowing → $I\uparrow$
3. AD–AS: $AD\rightarrow$ (right) → $Y\uparrow$ and $PL\uparrow$
4. Phillips curve: in short run, inflation tends to rise as unemployment falls.

3) Key Formulas, Rules & Facts (Graph-Linked)

A) Core macro equations you should connect to graphs

B) Each required graph: axes, curves, and “shift causes”

1) PPF / PPC

• Axes: quantity of Good A vs Good B (often capital vs consumer goods)
• Shape: bowed out (increasing opportunity cost)
• Key moves:
  • On curve: efficient
  • Inside: recession/unemployment
  • Outside: unattainable now
  • Outward shift: growth (technology, resources)

2) AD–AS (with LRAS)

• Axes: $PL$ (y) vs real $Y$ (x)
• Curves:
  • AD: downward sloping (wealth effect, interest-rate effect, net export effect)
  • SRAS: upward sloping (sticky wages/input prices)
  • LRAS: vertical at $Y^*$ (potential output)
• Classic shifts:
  • AD right: $C\uparrow, I\uparrow, G\uparrow, T\downarrow, NX\uparrow, M_S\uparrow$ (via $i\downarrow$)
  • SRAS left: oil price spike, wages up, negative supply shock
  • SRAS right: productivity/tech improvements, input costs down

3) Keynesian Cross (Aggregate Expenditure model)

• Axes: AE (y) vs real $Y$ (x)
• Lines:
  • 45° line: where $AE = Y$
  • AE line: planned spending; slope is $MPC$
• Shifts:
  • Autonomous spending up (like $G\uparrow$ or $I\uparrow$): AE shifts up → equilibrium $Y\uparrow$ by multiplier

4) Money Market (Liquidity Preference)

• Axes: $i$ (y) vs quantity of money $M$ (x)
• Curves:
  • Money demand (MD): downward (transactions + asset demand)
  • Money supply (MS): vertical (set by Fed)
• Shifts:
  • MS right: expansionary monetary policy → $i\downarrow$
  • MD right: higher income/price level → $i\uparrow$

5) Loanable Funds Market

• Axes: real interest rate $r$ (y) vs quantity of loanable funds (x)
• Curves:
  • Supply: national saving (upward)
  • Demand: borrowing for investment (downward)
• Shifts:
  • Government deficit: public saving down → supply left → $r\uparrow$, crowding out $I\downarrow$
  • Higher productivity/expected returns: demand right → $r\uparrow$ and $I\uparrow$

6) Foreign Exchange (FOREX) Market

Two common AP setups—be consistent and label clearly.

• Option A (common): y-axis = $\text{price of foreign currency in USD}$ (e.g., $\text{USD per euro}$)
  • If this price rises, the foreign currency appreciates and the USD depreciates.
• Curves:
  • Demand for foreign currency: Americans buying foreign goods/assets
  • Supply of foreign currency: foreigners buying US goods/assets
• Shifts:
  • US interest rates rise: foreign capital inflow → demand for USD rises (equivalently, supply of foreign currency rises) → USD appreciates
  • US imports rise: demand for foreign currency rises → foreign currency appreciates

7) Phillips Curve

• Axes: inflation rate $\pi$ (y) vs unemployment rate $u$ (x)
• Curves:
  • SRPC: downward sloping (short-run tradeoff)
  • LRPC: vertical at natural rate $u^*$
• Moves/shifts:
  • Demand-pull inflation (AD right): move up/left along SRPC
  • Adverse supply shock (SRAS left): SRPC shifts right/up (higher inflation at every unemployment rate)

8) Lorenz Curve (income inequality)

• Axes: cumulative % of households (x) vs cumulative % of income (y)
• Line of equality: 45°
• More bowed Lorenz curve: more inequality

4) Examples & Applications (How AP Twists These)

Example 1: Expansionary fiscal policy in recession

Scenario: Economy is below potential output; government increases $G$.

• AD–AS: $AD\rightarrow$ → $Y\uparrow$, $PL\uparrow$
• Loanable funds: deficit likely rises → supply left → $r\uparrow$ (crowding out some $I$)
• Key insight: Fiscal expansion raises output but can raise interest rates.

Example 2: Negative supply shock (oil price spike)

• SRAS: shifts left
• AD–AS result: $Y\downarrow$ and $PL\uparrow$ (stagflation)
• Phillips: SRPC shifts right/up (worse inflation-unemployment combo)
• Key insight: Demand policy here is tricky: boosting AD fights unemployment but worsens inflation.

Example 3: Fed raises reserve requirement

• Banking/money supply: multiplier down → $M_S\downarrow$
• Money market: $MS\leftarrow$ → $i\uparrow$
• AD–AS: $I\downarrow$ → $AD\leftarrow$ → $Y\downarrow$ and $PL\downarrow$
• Key insight: Tight money → higher rates → lower investment → lower AD.

Example 4: USD appreciation and net exports

Scenario: Higher US interest rates attract foreign investors.

• FOREX: demand for USD rises → USD appreciates
• Net exports: US exports more expensive, imports cheaper → $NX\downarrow$
• AD–AS: $AD\leftarrow$ (because $NX$ falls)
• Key insight: Stronger currency tends to reduce AD through $NX$.

5) Common Mistakes & Traps

1. Mixing up Money Market vs Loanable Funds

   • Wrong: Using money market to show government borrowing.
   • Fix: Gov deficits → loanable funds supply left (crowding out). Fed actions → money market MS shift.

2. Forgetting what the y-axis “price” is

   • Wrong: Saying “price rises” in money market.
   • Fix: In money market, the “price of money” is $i$.

3. Confusing appreciation/depreciation on FOREX

   • Wrong: If $\text{USD per euro}$ rises, saying USD appreciates.
   • Fix: If foreign currency costs more USD, the USD depreciated (it buys fewer euros).

4. Shifting LRAS in the short run

   • Wrong: Treating an AD change as shifting LRAS.
   • Fix: LRAS shifts with long-run productivity/resources (growth), not short-run demand policy.

5. Moving along vs shifting AD

   • Wrong: “Price level rises so AD shifts left.”
   • Fix: A change in $PL$ causes a **movement along AD**, not a shift. Shifts come from $C,I,G,NX$ or monetary transmission.

6. Saying ‘SRAS always returns by itself immediately’

   • Wrong: Assuming instant long-run adjustment.
   • Fix: Long-run adjustment happens as nominal wages/expectations adjust; in the interim, SRAS can stay shifted.

7. Keynesian cross: confusing the 45° line with AE

   • Wrong: Shifting the 45° line.
   • Fix: The 45° line is fixed; AE shifts with autonomous spending.

8. Crowding out direction errors

   • Wrong: Deficit increases saving supply.
   • Fix: Deficit reduces national saving → loanable funds supply left → $r\uparrow$ → $I\downarrow$.

6) Memory Aids & Quick Tricks

7) Quick Review Checklist (2-minute glance)

• Can you draw and label axes for: AD–AS, money market, loanable funds, FOREX, Phillips, Keynesian cross, PPF?
• Do you know the direction rules?
  • $MS\uparrow \Rightarrow i\downarrow \Rightarrow I\uparrow \Rightarrow AD\uparrow$
  • Deficit $\uparrow \Rightarrow S\downarrow \Rightarrow r\uparrow \Rightarrow I\downarrow$
  • USD appreciation $\Rightarrow NX\downarrow \Rightarrow AD\downarrow$
• Can you distinguish shifts vs movements along (especially AD and MD)?
• Can you handle supply shocks: SRAS left and SRPC shift right/up?
• Can you state the big outcomes quickly: $Y$, $PL$, $u$, $i$, exchange rate, $NX$?

You’re aiming for clean graphs, clean labels, and confident direction-of-change statements—those are the fastest points on AP Macro.