10 Macroeconomics Graphs You Must Need To Know

There are many graphs in macroeconomics. In this article, we will discuss about a ten main macroeconomics graphs. They are,

Aggregate Expenditure Graph

Aggregate demand and aggregate supply graph

IS-LM model graph

IS curve

LM curve

Money demand curve

Money supply graph

Money market equilibrium graph

Inflationary gap vs recessionary gap graph

List of graphs for macroeconomics

Macroeconomics Graph 1: Aggregate Expenditure Graph

The aggregate expenditure model shows the total expenditure is incurred by an economy to buy goods and services produced. We can use the aggregate expenditure model to determine the gross domestic product (GDP) or national income level of a country within a specific period.

The aggregate expenditure of a nation can be graphed as follows. This is also called the Keynesian cross diagram.

In above macroeconomics graph, AE line represents the aggregate expenditure of an economy while 45-degree line represents the set of output levels of real GDP level equals to aggregate expenditure of an economy (Y = E).  

When the macroeconomy is in equilibrium, it must be true that the aggregate expenditures in the economy are equal to the real GDP—because by definition. So, according to the aggregate expenditure model, the equilibrium of the economy occurs when the AE line intercepts the 45-degree line. So, in the above economic graph, Yf output level shows the equilibrium output level of an economy.

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Macroeconomics Graph 2: AD AS Curve (Aggregate demand and aggregate supply graph)

In this list of graphs for macroeconomics, AD AS curve will be presented as the second macroeconomics graph.

AD-AS model (aggregate demand and aggregate supply model) explains how national income and general price level are changed together. So, we can use AD-AS model to illustrate the changes of the macroeconomic variables such as real GDP, Inflation, unemployment and to illustrate the phrases of the business cycle.

AD AS curve (in other words, aggregate demand and aggregate supply graph) is comprised with three curves. They are,

1. Aggregate demand (AD) curve

2. Short-run aggregate supply (SRAS) curve

3. Long-run aggregate supply (LRAS) curve

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Macroeconomics Graph 3: Business cycle curve

Third one of the list of macroeconomics graphs is business cycle graph.

The business cycle goes through four major phases: expansion, peak, contraction, and trough. Usually, the recession occurs in the contraction phase and inflation occurs in the expansion phase of the business cycle.

We can see several main differences between inflation and recession. Let’s discuss about the difference between inflation and recession.

Macroeconomics Graph 4: IS-LM model graph

The following economic graph shows the IS LM model. Vertical axis presents the interest rate and horizontal axis presents the aggregate income level or output. At the point E1, IS curve and LM curve are intersected each other. At this point, we can determine the equilibrium output level of the economy and it is Y1.

Macroeconomics Graph 5: IS curve

In this list of graphs for macroeconomics, AD AS curve will be presented as the fifth macroeconomics graph.

IS curve is a combination of many equilibrium points of the goods market (total savings equals total investments) at various real interest rates and real output levels.

IS curve has a downward slope. Because there is a negative relationship between the national savings and the real output level of the economy. Because when interest rate is increasing, people decreases their domestic consumption, investment and net exports. This relationship is presented by the IS curve as follows.

Macroeconomics Graph 6: LM curve

LM curve is a combination of many equilibrium points of the assets market (money supplied equals money demanded) at various real interest rates and real output levels.

LM curve have an upward slope. Because there is a positive relationship between the quantity of money and real output level of the economy.

The following graph shows the derivation of the LM (liquidity money) curve under money market changes. According to the following money market graph, at the point E1, the money market equilibrium exists (the point where the money supply curve intersects the MD1 money demand curve). LM curve is a combination of many equilibrium points of the money market (money supplied equals money demanded). Point E1 equilibrium point of the money market is presented by point A of the LM curve.

After that money demand shifted to the MD2. Money market equilibrium has shifted to the E2. At point E2, the money supply curve intersects the MD2 money demand curve. Point E2 equilibrium point of the money market is presented by point B of the LM curve.

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Macroeconomics Graph 7: Money demand curve

The money demand curve shows the aggregate quantities of money demanded by people in an economy at various interest rates when their income, expectations, and other factors are ceteris paribus (all other things being unchanged or constant).

The money demand curve is negatively sloped. Because there is an inverse relationship between the quantity of money demand in an economy and the interest rate. In other words, the money demand curve is downward sloping because of the interest rate, which represents the opportunity cost of holding money.

The following money demand curve shows the aggregate quantities of money demanded by people in an economy at various interest rates.

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Macroeconomics Graph 8: Money supply graph

The money supply curve shows the relationship between the quantity of money supplied and market interest rate.  A county’s money supply curve is a vertical line. In other words, it is not an upward or downward curve. Because the money supply is not depend on the interest rate. So, the following graph shows the money supply of a country.

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Macroeconomics Graph 9: Money market equilibrium graph

The following money market graph shows the money market demand and supply forces and the equilibrium of the money market. The horizontal axis of the money market shows the quantity of money and the vertical axis shows the nominal interest rate. When money demand equals the money supply, money market equilibrium is occurred (at point E1).

According to the following money market graph, when the nominal interest rate is higher than the equilibrium interest rate, the money supply exceeds the money demand. So, the nominal interest rate is decreasing and then people increase the demand for money. Finally, the money market comes to the equilibrium point.

Macroeconomics Graph 10: Inflationary gap vs recessionary gap graph

Both inflationary and recessionary gaps occur when the economy is in the short run.

Simply we measure the recessionary and inflationary gaps by subtracting the potential GDP (full employment level GDP) from the actual GDP

Inflationary Gap/ Recessionary Gap = Actual GDP Level – Full Employment Level GDP

If the answer is negative (actual GDP level < potential GDP), there is a recessionary gap.

If the answer is positive (actual GDP level > potential GDP), there is an inflationary gap