AP® Macro Unit 3: National Income and Price Determination
Topic 3.1- Aggregate Demand (AD) Topic 3.2- Multipliers
1. What is the difference between a market demand 1. What is the multiplier effect?
curve and the aggregate demand curve?
2. Define marginal propensity to consume (MPC)
2. What three concepts explain why aggregate
demand is downward sloping?
4. Define marginal propensity to save (MPS)
3. What are the shifters of aggregate demand? 5. Equation for the simple spending multiplier
6. Equation for the tax multiplier
Topic 3.3- Short-run Aggregate Supply (SRAS)
1. Why is short-run aggregate supply upward 7. Fill in the blanks below:
sloping? Initial Initial Maximum
MPC
Change Amount Change
↓G $30 billion ↓$60 billion
2. What are the shifters of short-run aggregate ↑C .9 ↑$200 billion
supply?
↓ Taxes $10 billion .8
↑I .75 ↑$80 billion
Topic 3.4- Long-run Aggregate Supply (LRAS) ↑M $10 billion .9
1. Why is long-run aggregate supply vertical?
↑X $10 billion ↑$50 billion
↑ Transfer
$20 billion .9
Payments
Topic 3.5- Equilibrium in the AD-AS Model
1. Draw an economy with a 2. Draw an economy at full 3. Draw an economy with a
negative output gap employment positive output gap
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Topic 3.6- Changes in the AD-AS Model in the Short Run
Answer the following questions (assume that each
event takes places independently)
1. What is the short-run equilibrium price level
and output?
2. Identify the short-run equilibrium price level and
output if consumption increased?
3. Identify the short-run equilibrium price level and
output after a negative supply shock?
4. What happens to output and unemployment if
investment falls?
5. Use the graph to explain the difference between
demand-pull and costs-push inflation.
6. What is a negative supply shock? 9. Define deflation
7. What is a positive supply shock? 10. What is autonomous consumption?
8. Define stagflation 11. What is disposable income?
Topic 3.7- Long-run Self-Adjustment
1. Explain how the economy self- 3. Assuming wages and resource prices are flexible, show how each
adjusts in the long run when economy below will self-adjust in the long run
there is a negative output gap Economy #1 Economy #2
2. Explain how the economy self-
adjusts in the long run when
there is a positive output gap
4. Assume instead that Economy #2 experiences economic growth.
What happens to LRAS and output?
5. Does the natural rate of unemployment increase, decrease, or stay
the same when the LRAS shifts right?
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Topic 3.8- Fiscal Policy
1. Define expansionary fiscal policy 3. Explain why an increase in government
spending will lead to more total spending
than a decrease in taxes by the same amount.
2. Define contractionary fiscal policy
Use the graph to answer the questions to the right. 4. Is there a recessionary gap or inflationary gap?
Assume wages and resource prices are flexible.
5. What happens to price level and output in the
long run if no policy action is taken?
6. Assume instead that the government decides to
use fiscal policy. Identify two policies that could
close the gap.
7. If the MPC is .5, what is the least amount of
government spending that could close the gap?
8. If the MPC is .5, what is the least amount the
government could cut taxes to close the gap?
Topic 3.9- Automatic Stabilizers 9. Assume instead that the MPC is .9. What is the
1. Define discretionary fiscal policy least amount of government spending that could
close the gap?
2. Define non-discretionary fiscal policy 10. Would an increase in private saving increase or
decrease the effectiveness of fiscal policy?
3. Identify three different examples of automatic 11. Why are there lags when the government uses
stabilizers. discretionary fiscal policy?
Unit Review
True or False
Change in
1. An increase in expected inflation will decrease Scenario ↑ or ↓
AD or AS
the short-run aggregate supply.
2. An increase in interest rates will increase 8. Government uses
investment and aggregate demand. expansionary fiscal policy
3. The spending multiplier is weaker than the tax 9. No policy when there is a
multiplier. recession
4. Fiscal policy includes government spending and 10. Government increases
taxation. taxes on consumers
5. If the MPS is .2 the tax multiplier is 4. 11. There is a decrease in
6. When the MPC increases, the spending imports
multiplier decreases. 12. Positive output gap.
7. Jacob Clifford is very attractive. Government takes no policy
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