AP Macroeconomics Unit 3: National Income and Price Determination

These notes are for Unit 3 of AP Macroeconomics but can be used by anyone looking to understand the AD-AS model, fiscal policy, and how the economy fixes itself from a recession/inflation. Aggregate demand (AD), Short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) are all defined, explained, and demonstrated with a graph. I also include multiple factors for an increase and decrease in all 3 of these things, and the 3 effects of why AD is downward sloping. The short run and the long run are also defined and their implications on businesses are explained. I explain what it means when the AD-AS model is in long-run equilibrium, in an inflationary gap, and in a recessionary gap and include 3 graphs to demonstrate these. There are also graphs for a positive demand shock, negative demand shock, positive supply shock, and negative supply shock. I include the short-run results of these shocks. Furthermore, I give an in-depth explanation of how recessionary and inflationary gaps self-adjust in the long-run and include graphs to demonstrate how this happens. In the case that government action is involved, this document also describes fiscal policy, when to use expansionary/contractionary policy, and how it affects the AD-AS model (graphs are included for this). There are examples of how much the government must spend and how much they must cut/increase taxes to fix a recessionary/inflationary gap. The difference between discretionary fiscal policy and automatic stabilizers is also included, as well as the details of expansionary and contractionary automatic stabilizers. The following equations are provided: the marginal propensity to consume (MPC), marginal propensity to save (MPS), expenditures multiplier, and tax multiplier. I give examples for the expenditures multiplier and tax multiplier and when to use each.