UNIT 3 AP MACROECONOMICS - Unit 3-National Income and Price Determination - Aggregate Demand, SRAS, LRAS, AD-AS Model and Fiscal Policy

Sep 20, 2026

Uploaded by Margaret

AP Macroeconomics Unit 3 focuses on national income and the determination of price levels using the aggregate demand and aggregate supply framework. It explains why the aggregate demand curve slopes downward through real-balance, interest rate, and open economy effects, and identifies key demand shifters such as expectations, wealth, and capital stock. The unit also covers SRAS and LRAS behavior, recessionary and inflationary gaps, self-correction in the long run, and equilibrium logic, then connects fiscal policy to AD through expansionary and contractionary measures plus automatic stabilizers.

LanguageEnglish

CategoryExam

FormatPDF

Pages6

Reading Time15 min

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Unit 3-National Income and Price Determination

Aggregate Demand Curve (AD)

Short-run Aggregate Supply (SRAS)

Long-run Aggregate Supply (LRAS)

AD-AS Model and Shocks

Equilibrium, Recessionary/Inflationary Gaps

Fiscal Policies and Automatic Stabilizers

UNIT 3 AP MACROECONOMICS From Simple Studies, [https://simplestudies.edublogs.org](https://simplestudies.edublogs.org &)[ &](https://simplestudies.edublogs.org &)@simplestudiesinc on Instagram Unit 3-National Income and Price Determination AGGREGATE DEMAND CURVE Shows relationship between aggregate price level & quantity of aggregate demand by households, firms, government, and the rest ofthe world. DOWARDING SLOPE BECAUSE OF ● Real-balance effect (increase in price level decreases the purchasing power of money) ● Interest rate effect (increase in interest rate decreases borrowing and spending) ● Open economy effect (higher price levels decreases net exports) ○ Made up of consumption, investment, government spending, and net exports ● Shifters ● Changes in expectations (optimistic beliefs increase demand) ● Changes in wealth (rise in asset value increase demand) ● Size of existing physical capital (small existing stock of physical capital increases demand) Fiscal Policy: Government spending increase or tax cuts increase demand. Monetary Policy: Quantity of money increases demand. Increase: Decrease: Short-run Aggregate Supply (SRAS) When firms haven’t made price changes in response to an economic shock (sticky prices) . Is upward sloping because of UPWARD SLOPE BECAUSE OF ● The misperception theory (producers mistaken price increase as greater profit) ● Sticky Price Theory (producers temporarily reduce quantity b/c of menu costs) ● Sticky Wage Theory (production costs can be higher from union contracts) ● Shifters ● Changes in commodity prices (lower commodity price increases SRAS) ● Changes in nominal wages (lower nominal wages increases SRAS) ● Changes in productivity (more productive workers increases SRAS) Increase- Decrease- Long-run aggregate supply (LRAS) ● After producers have adjusted their prices according to economic shocks ● All production costs are fully flexible ● It is an economy’s potential output (represent the full-employment output) ● Shifters that cause and increase ● Increases in the quantity of resources (e.g., land, labor) ● Increases in the quality of resources (e.g., education) ● Technological progress can increase LRAS Increase- Decrease is opposite LRAS shifts indicate changes in full-employment level of output & economic growth. AD-AS MODEL ● If aggregate price level is above equilibrium, AS will exceed AD and cause the aggregate PL to fall, pushing it back to the equilibrium. If aggregate price level is below equilibrium, AD will exceed AS and cause the aggregate price level to rise, pushing it back to the equilibrium. ● Positive demand shock increases aggregate price and aggregate output (demand-pull). Negative demand shock decreases aggregate price and aggregate output. ● Positive supply shock decreases aggregate price and increases aggregate output. Negative supply shock increases aggregate price and decreases aggregate output (supply-push). Recessionary gap: Exists when SRAS equilibrium is less than LRAS equilibrium. If so, wages would fall and SRAS would shift to the right, bringing the economy back to LRAS equilibrium. Inflationary gap: Exists when SRAS equilibrium is greater than LRAS equilibrium. If so, wages would rise and SRAS would shift to the right, bringing the economy back to LRAS equilibrium. ● Economy self-corrects in the long-run EQUILIBRIUM ● Short-run equilibrium is when AD & SRAS are equal ● Long-run equilibrium is when AD & SRAS are equal and interest on LRAS FISCAL POLICIES (affect AD) Expansionary Fiscal policies that increase aggregate demand: ● Increase in government purchases (has greatest effect) Multiplier = MPC = (Change in consumer spending) / change in disposable income MPC+MPS = 1 ● Cut in taxes Multiplier = (MPC) / MPS MPS = 1-MPC ● Increase in government transfers Contractionary Fiscal Policies that decrease aggregate demand: ● Decrease in

FAQs

Why does the aggregate demand curve slope downward?

It slopes downward due to the real-balance effect, the interest rate effect, and the open economy effect. As the price level rises, purchasing power and borrowing/spending fall, and net exports decrease.

What determines SRAS and why is it upward sloping?

SRAS reflects sticky prices and producer/wage rigidities after an economic shock. It is upward sloping because of misperception theory, sticky price theory (menu costs), and sticky wage theory, plus relevant shifters like commodity prices, nominal wages, and productivity.

How do fiscal policies affect aggregate demand and how do automatic stabilizers work?

Expansionary fiscal policy increases AD through higher government purchases, tax cuts, and transfers; contractionary policy decreases AD via lower purchases, higher taxes, and lower transfers. Automatic stabilizers make fiscal policy naturally expansionary in recessions and contractionary in expansions as tax revenues respond to GDP changes.

Sep 20, 2026

Uploaded by Margaret