AP Macroeconomics Unit 3: National Income & Price Determination
Study aggregate demand, aggregate supply, fiscal policy, multiplier with exam-format practice and rubric-based scoring.
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Inside This Unit: The Full Breakdown
This unit introduces the aggregate demand-aggregate supply (AD-AS) model, the central framework of macroeconomics. Students learn how changes in spending, production costs, and government policy shift these curves and affect output, employment, and prices.
Why it matters
The AD-AS model is the most important framework on the AP Macro exam. Nearly every free-response question requires you to draw, shift, or interpret AD-AS diagrams. Mastering this model is essential for a strong score.
Key concepts
- Aggregate demand (AD) shows the total spending in the economy at each price level, sloping downward due to wealth, interest rate, and exchange rate effects.
- Short-run aggregate supply (SRAS) shows total output at each price level, sloping upward because some input costs are sticky in the short run.
- Long-run aggregate supply (LRAS) is vertical at the full-employment level of output, representing the economy's potential GDP.
- The multiplier effect amplifies changes in spending — an initial increase in investment or government spending generates a larger total change in GDP.
Aggregate Demand
Aggregate demand represents total planned spending (C + I + G + Xn) at each price level. The AD curve slopes downward for three reasons: the wealth effect (higher prices reduce the purchasing power of savings), the interest rate effect (higher prices increase money demand, raising interest rates and reducing investment), and the exchange rate effect (higher domestic prices make exports more expensive and imports cheaper). Anything that changes total spending at a given price level shifts the AD curve. On the AP exam, you must identify what shifts AD and in which direction.
Aggregate Supply (Short-Run and Long-Run)
Short-run aggregate supply slopes upward because some input costs — especially wages — are sticky and do not adjust immediately to price level changes. When the price level rises but wages lag behind, firms find it profitable to expand production. Long-run aggregate supply is vertical at potential output because all prices and wages have fully adjusted. Changes in input costs, productivity, or expectations shift SRAS. Changes in the quantity or quality of resources or technology shift both SRAS and LRAS. Understanding which factors shift each curve is one of the most frequently tested skills on the AP exam.
The Multiplier and Fiscal Policy
The spending multiplier shows how an initial change in spending creates a larger change in total output. If the marginal propensity to consume (MPC) is 0.8, the multiplier is 1/(1-0.8) = 5, meaning a $100 increase in government spending increases GDP by $500. The tax multiplier is smaller because tax changes affect spending indirectly through disposable income. Fiscal policy — government changes in spending and taxation — uses these multiplier effects to shift aggregate demand and influence output and employment. The AP exam frequently tests multiplier calculations and their application to fiscal policy scenarios.
AP exam tip
On free-response questions, always draw a correctly labeled AD-AS diagram showing the initial equilibrium, the shift, and the new equilibrium. Label both axes (price level and real GDP), all curves, and both equilibrium points. Missing labels cost points.
Connections to other units
- Unit 1: The AD-AS model explains the economic indicators — GDP, unemployment, and inflation — measured in Unit 2.
- Unit 3: Monetary policy shifts AD through interest rate changes, complementing the fiscal policy tools in this unit.
- Unit 4: Long-run adjustments and the Phillips curve extend the AD-AS framework to policy tradeoffs over time.
