hey econ students this is jacob clifford if you're enrolled in an ap or college introductory macroeconomics class this is probably the most important video that you're ever going to watch i'm going to cover every single graph that you need to know and explain how they interact with each other the first graph that you learn in any economics class is the production possibilities curve or frontier it's super easy it shows you an economy that can produce either consumer goods or capital goods and this line represents the total amount of goods we can produce using all of our resources so any point outside the curve is impossible we can't produce it because we don't have enough resources and any point on the curve is efficient because we're using all of our resources to the max any point inside the curve is inefficient we could be producing more and we're not utilizing our resources and that shows the concept of unemployment and in unit 2 you expand on this you learn there's actually three types of unemployment there's frictional structural and cyclical even when the economy is doing great you're still going to have two types of unemployment you're going to have people between jobs frictionally unemployed and you have people being replaced by robots so structural unemployment so this line represents the idea of full employment no matter what even if the economy is doing great we're still going to have something like five percent unemployment but if the economy were to tank and there'd be a decrease in consumer spending and we'd have more unemployment that would put us here we'd have frictional structural and cyclical unemployment and this represents the idea of a recession okay but what if the economy is doing really well and we have something like only two percent unemployment to show that concept let's add another line now this is not a shift in the production possibilities curve this just represents zero percent unemployment there's no frictional there's no structural everyone is working so if there's a whole lot of economic activity and unemployment falls from five percent to only two percent that would be a move right here we're producing a lot of stuff and we're here in the short run but it can't stay there in the long run it's not sustainable i'll talk more about that later for now the important thing is to see that this graph shows the economy can only be in one of three places we could have a recession we can have full employment or we can have an inflationary gap with the economy overheating and all those concepts can be shown on the second graph you learn the business cycle now this is not one of those graphs that your teacher professor is going to make you draw but it is going to help you understand the concepts the economy goes down and up over time and it creates a trend line and that represents the idea of full employment when the economy experiences a recession there's a decrease in gdp and unemployment increases so we have frictional structural and cyclical unemployment then there's a recovery unemployment starts to go down we end up at full employment with only frictional and structural and if there's even more spending we can end up here where we have frictional structural but just really small and we have a inflationary gap there's super low unemployment and the economy is overheating and again notice the economy can only be in one of three places we have a recessionary gap full employment or an inflationary gap now let's do that all over again with the most important graph you need to know for your macroeconomics class aggregate demand and aggregate supply this graph shows you the demand for everything and the supply for everything and it sets their real gdp the amount we're going to produce in the economy let's start by saying we're producing at full employment we only have frictional and structural unemployment no cyclical unemployment if consumer spending were to fall then aggregate demand would shift to the left and unemployment would increase so now we have frictional structural and cyclical unemployment and we're producing an output that's less than our full employment output that's why this is called a negative output gap now the government might come in to use fiscal policy to close the gap or the central bank might come in and use monetary policy but let's just assume we wait it out over time the economy self-adjusts the price of all these unused resources and unused workers will eventually fall that'll mean producers can produce more stuff so the aggregate supply will shift to the right putting us back at full employment let me show you that again on the three graphs that we've covered so far we start at full employment where there's only frictional and structural unemployment but then consumer spending falls there's a decrease in gdp and an increase in unemployment we end up with a recessionary gap or a negative output gap but that's just the short run in the long run eventually over time wages and resource prices will fall aggregate supply will increase we'll end up here back in the long run and that explains why the long run agri-supply curve is vertical the economy can move around in the short run but eventually it's going to end up right here in the long run at full employment okay let's do the other side let's assume we're at full employment and there's an increase in consumer spending so now aggregate demand increases unemployment starts to fall and we end up with a positive output gap or an inflationary gap but that's just showing the short run eventually over time in the long run with all that inflation the price of resources the price of workers is going to increase and that means less production so the supply is going to shift to the left and in the long run put us at full employment at the long run aggregate supply so these same concepts can be shown on three grasps but there's actually one more you learn it in unit five it's called the phillips curve the graph shows the relationship between inflation and unemployment and the vertical long run phillips curve represents the idea of full employment only frictional and structural unemployment so we're gonna end up there in the long run but in the short run we can have an economy that's doing really bad with high unemployment but also low inflation and that would be a negative output gap a recessionary gap or we can have an economy with very low unemployment except more higher prices and have an inflationary gap which is right here when you connect those dots you get the short run phillips curve so again the graph shows the economy can only be in one of three places we can have a negative output gap full employment or a positive output gap inflationary gap okay now let's put all the graphs together and showed economy at full employment if there's a decrease in consumer spending or business spending or government spending the aggregate demand would decrease we end up with a negative output gap with high unemployment but that's just the short run eventually over time the economy self-adjusts prices of resources and wages will fall aggregate supply will shift to the right putting us back at the long run but notice what happened on the phillips curve when aggregate supply shifted to the right the price level fell and gdp increased and that ended up with less unemployment so that means the entire short run phillips curve had to shift now here's a tip that might help you any time there's an increase or a decrease in aggregate demand that's going to move along the short run phillips curve but if the aggregate supply shifts that's going to shift the short run phillips curve boom awesome you got it these four graphs the most important because they show you where the economy is and how it changes and it's what your teacher or professor is going to make you draw and that's why i just added brand new free responses for each unit in my ultimate review package now of course i gave you the answer keys so you can check your answers but i also made exclusive videos to explain each one of the questions and give you tips to make sure you totally get it again these are all inside my ultimate review packet the link is below the point here is make sure you can draw each one of these graphs and show changes of what happened in the short run and the long run but we're not done let's take a look at this this is the money market graph that shows you the demand and supply for money now this is nothing like the other graphs you've learned we can't show you on this graph where is a negative output gap or a positive output gap this is a policy graph changes on this graph affect the other four graphs that we already talked about and the key here is to understand the role of interest rates and how it affects spending that vertical supply of money is set by the country's central bank and increasing it or decreasing it to affect the interest rate is called monetary policy for example let's assume the economy's in a recession there's high unemployment and we have a negative output gap the central bank wants to speed up the economy so they increase the money supply by buying bonds this would mean there's more money out there for banks to loan out and that would drive down the nominal interest rate so now interest rates are lower so it's easier for businesses and consumers to take out loans that would mean more spending and an increase in aggregate demand it would close that negative output gap putting us at full employment but again notice we're not showing the idea of recession on this graph we're showing the changes in this graph how they affect that graph okay let's do that over again except this time assuming we have a positive output gaps with really low unemployment except high inflation and we're here the central bank comes in realize it's got a problem it'll decrease the money supply which will cause the interest rate to increase higher interest rate means less borrowing less spending consumers and businesses that would decrease the aggregate demand fight inflation and put us back at full employment this is the idea of monetary policy again this is called the money market graph and it shows you the supply and demand for money and it sets the nominal interest rate but there's another graph you have to know called the loanable funds market which sets the real interest rate this graph shows the demand of loans set by borrowers and the supply of loans set by savers the main difference between the money market graph and loanable funds market is that this one focuses on the short run and sets the nominal interest rate whereas this one focuses on the long run and sets the real interest rate now of course there's more to it than that but i'm not going to cover it now instead if you want to learn more about that take a look in the link in the description one of the things you got to know about the loanable funds market is that changes here can affect the economy in the long run for example assume that foreigners want to put a lot of money into your economy that would increase the supply of loanable funds and decrease the real interest rate that means that consumers and businesses are going to take out more loans it's going to increase consumer spending and investment more investment means more factories and tools and physical capitals we can produce more than we did before so a decrease in the real interest rate means there's an increase in business spending and investment so aggregate demand goes up and because we have more tools aggregate supply goes up and that means we also have an increase in the long-run ag supply the economy is growing this shows the idea of economic growth and of course you can show that same concept on the production possibly is curve when the longer supply curve shifts to the right we can produce more than we ever could before that's like this curve shifting outward making points over once impossible possible again the loanable funds market doesn't show you where the economy is you can't draw a negative output gap or full employment on this graph but changes on this graph affect the other graphs that show you where the economy is and how it's changing okay we talked about four graphs that show where the economy is another graph that shows you how the central bank affects the overall economy and another graph that shows you the effect of changes in lending and borrowing now it's time to look at other countries buying your currency in the foreign exchange market this graph shows you the demand and supply of any currency let's say dollars and it sets the exchange rate to keep it simple the demand for dollars is set by foreigners and the supply for dollars is set by residents and again this graph doesn't show you where the economy is you can't draw a negative output gap or full employment on this graph but changes on this graph affect net exports and that affects the overall economy for example let's assume that europeans want to buy more u.s products they need dollars to pay for them that's going to increase the demand for dollars the price of the dollar is going to increase with the dollar appreciated relative to the euro but what's going to happen now if the dollar appreciates how's that going to affect the overall economy let's assume that the economy is at full employment if the dollar appreciates and is now more expensive for europeans europeans can't buy as many american exports so the aggregate demand is going to fall because net exports falls aggregate demand would go down and we end up here at a negative output gap now there's a bunch of things that can change the supply or the demand for your currency changes in inflation or income or interest rates those all shift this curve but most importantly you're going to have to practice you have to sit down do a practice for your response question that says okay show an economy using the phillips curve or aggregate demand supply the production possibilities curve showing an economy with a recession then this event happens or there's a change in the money market graph or the loan of a funds market or the foreign exchange market be able to show all those changes on all the graphs but there's still one more graph you might see it's right here it's called the aggregate expenditures model this graph is not part of the ap curriculum so if you're an ap class do not learn this graph it might be your book just ignore it if you're in a college level university class you might see this graph but i'm not going to cover it in this video if you want me to make a separate video talking about that graph let me know in the comments below and let me know if this video helped you and be sure to like and subscribe thanks for watching this video until next time