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Study note

Jessica Wang

United States of America

AP Macroeconomics

ap macro unit 3 overview

National Income and Price Determination

Changes in the AD-AS Model in the Short Run

AP MACRO UNIT 3
Summary
- AD (C+I+G + Xn) curve is demand for everything
• The Wealth Effect: higher price levels reduce the purchasing power of money,
decreasing the quantity of expenditure and vice versa
• Interest Rate Effect: when the price level increases, lender need to charge higher
interest rates to get a real return on their loans - higher interest rates discourage
consumer spending and business investment
1
• Foreign Trade Effect: when the U.S. price level rises, foreign buyers purchase
fewer U.S. goods and Americans buy more foreign goods - exports fall and
imports rise, meaning real GDP falls
Spending multiplier: 1/MPS or 1/1-MPC
- Tax multiplier: 1-spending multiplier or MPC/MPS
- In the short run, wages and resource prices do not change
• SRAS shifts when there is change in price of resources, taxes, subsidies,
regulation, productivity, and expectations
- In the long run, wages and resource prices are going to adjust
• No relation between price level and real GDP in the long run (@ full employment/
natural rate of unemployment)
Changes in SRAS/AD:
• Negative supply shock: running out of a key resource (electricity, oil), shifting
SRAS left, resulting to stagflation (high unemployment, high inflation)
• Positive supply shock: more of a key resource, shifting SRAS right, price level
decreases, more output
Cost-push inflation: SRAS shifts to left, higher inflation, less output • Demand-pull inflation: AD shifts to right, higher price level (people are buying more
stuff)
• Quantity (Real GDP) is the opposite of unemployment: if output is higher,
unemployment is lower, and vice versa
Long run-adjustments:
• SRAS adjusts because resource prices change
• SRAS will shift to go back to full employment
• More spending on things that improve human capital -> LRAS shift to the right
- Fiscal Policy (changes in AD):
• Expansionary Fiscal Policy: laws that reduce unemployment and increase GDP
Increasing govt. spending, decreasing taxes (increasing disposable income)
• Contractionary Fiscal Policy: laws that reduce inflation and decrease GDP
Decreasing govt. spending, increasing taxes (decreasing disposable income)
- Automatic Stabilizers:
2
-
• Non-discretionary fiscal policy
Permanent spending/taxation laws enacted to work counter cyclically to
stabilize the economy
- When GDP goes down, govt. spending automatically increases, taxes
automatically fall
Examples: welfare, unemployment, income tax

ap macro unit 3 overview

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ap macro unit 3 overview

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Knowunity is the # 1 ranked education app in five European countries

Knowunity was a featured story by Apple and has consistently topped the app store charts within the education category in Germany, Italy, Poland, Switzerland and United Kingdom. Join Knowunity today and help millions of students around the world.

4.9+

20 M

#1

950 K+

Still not sure? Look at what your fellow peers are saying...

I love this app so much [...] I recommend Knowunity to everyone!!! I went from a C to an A with it :D

The application is very simple and well designed. So far I have found what I was looking for :D

Love this App ❤️, I use it basically all the time whenever I'm studying