1. AP Macroeconomics The AS/AD Model
FRQ – 2011 #1; 2011B #1; 2010 #1; 2010B #1; 2009B #1; 2008B #1; 2007 #1; 2007B #1; 2006 #1; 2006B #1

2. The AS/AD Model
The equilibrium of AS & AD determines current output (GDPR) and the price level (PL)
LRAS
SRAS PL P AD YF
GDPR

3. Full Employment
Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.
LRAS
SRAS PL P AD YF
GDPR

4. Recessionary Gap
A recessionary gap exists when equilibrium occurs below full employment output.
SRAS
LRAS PL P AD Y YF
GDPR

5. Inflationary Gap
An inflationary gap exists when equilibrium occurs beyond full employment output.
LRAS
SRAS PL P AD YF Y
GDPR

6. Changes (Δ) in AD Δ Consumption (C) Δ Gross Private Investment (IG)
C↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
C↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Gross Private Investment (IG)
IG↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
IG↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Government Spending (G)
G↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
G↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Net Exports (XN)
XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

7. C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
Increase in AD
SRAS
LRAS PL  P1  P
AD1 AD  Y YF
GDPR
C↑, IG↑, G↑ and/or XN↑ .: AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑

8. C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Decrease in AD
LRAS PL
SRAS  P  P1 AD
AD1  YF Y
GDPR
C↓, IG↓, G↓ and/or XN↓ .: AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓

9. Changes (Δ) in SRAS Δ Input Prices Δ Productivity
Input Prices↓ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Input Prices↑ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Δ Productivity
Productivity↑ .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Productivity↓ .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
Δ Legal-Institutional Environment
Deregulation .: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
Regulation .: SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑

10. Increase in SRAS Input Prices↓, Productivity↑, and/or Deregulation
LRAS PL
SRAS1  P  P1 AD  Y YF
GDPR
Input Prices↓, Productivity↑, and/or Deregulation
.: SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓

11. Decrease in SRAS Input Prices↑, Productivity↓, and/or Regulation
LRAS PL
SRAS  P1  P AD  Y1 YF
GDPR
Input Prices↑, Productivity↓, and/or Regulation
.: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑

12. AS / AD Summary ΔC, ΔIG, ΔG, and/or ΔXN = Δ AD
AD  .: GDPR↑ & PL↑ .: u%↓ & π%↑
AD  .: GDPR↓ & PL↓ .: u%↑ & π%↓
Δ Input Prices, Δ Productivity,
and/or Δ Regulation = Δ SRAS
SRAS  .: GDPR↑ & PL↓ .: u%↓ & π%↓
SRAS  .: GDPR↓ & PL ↑ .: u%↑ & π%↑
The AS/AD Model is the most important graph in AP Macroeconomics.
KNOW IT!!!

14. AD-AS Model Practice Questions
Use an appropriately labeled AD-AS model to illustrate the impact of each of the following events on price level, output, and unemployment.

15. Practice Question #1
Assume the economy is in equilibrium at full employment. If government spending (G) increases due to an outbreak of war, what is the impact of the spending on price level, output, and unemployment?
What economic condition or problem results?
Price
Level
Real GDP (GDPR)
SRAS
AD1
PLF YF
LRAS AD
AD2
PL2 Y2
Inflation
____ ____
____ Price Level
____ Output
____ Unemployment
Problem:

16. What economic condition or problem results?
Practice Question #2
Assume the economy is in equilibrium at full employment. If consumer indebtedness rises, what is the impact of the indebtedness on the price level, output, and unemployment?
What economic condition or problem results?
Price
Level
Real GDP (GDPR)
SRAS
AD1
PLF YF
LRAS
AD2
PL2 Y2 AD
Recession
____ ____
____ Price Level
____ Output
____ Unemployment
Problem:

17. Stagflation Practice Question #3 SRAS2 PL2 Y2 AS Price Level
Assume the economy is in equilibrium at full employment. If OPEC restricts the supply of oil and raises energy costs across the economy, what is the impact of the higher production costs on price level, output, and unemployment?
What economic problem/condition results?
SRAS2
PL2 Y2 AS
Stagflation
Cost-Push Inflation
Price
Level
Real GDP (GDPR)
SRAS1 AD
PLF YF
LRAS
____ ____
____ Price Level
____ Output
____ Unemployment
Problem:

18. Practice Question #4
Assume the economy is in a recession. If government reduces personal income taxes, what is the impact of the tax cut on price level, output, and unemployment?
What economic condition may result?
Price
Level
Real GDP (GDPR)
SRAS
LRAS
AD1
PL1 Y1 YF
AD2
PLF AD
Full Employment
____ ____
____ Price Level
____ Output
____ Unemployment
Condition:

19. Full Employment? Practice Question #5 Price Level Real GDP (GDPR) SRAS
Assume the economy is overheated and experiencing serious demand-pull inflation. If the FED increases interest rates by reducing the money supply, what will be the impact of the FED action on the price level, output, and unemployment?
What problem or condition may result?
Price
Level
Real GDP (GDPR)
SRAS
LRAS
AD1 Y1
PL1
AD2
PLF YF AD
Full Employment?
____ ____
____ Price Level
____ Output
____ Unemployment
Condition:

20. Practice Question #6
Assume the economy is in equilibrium at full employment. If productivity increases due to technological developments, what is the impact of the increased productivity on the price level, output, and unemployment?
Price
Level
Real GDP (GDPR)
SRAS1 AD
PLF YF
LRAS
SRAS2
PL2 Y2 AS
____ ____
____ Price Level
____ Output
____ Unemployment