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AP Macroeconomics

AP Macroeconomics. The AS/AD Model. The AS/AD Model. The equilibrium of AS & AD determines current output (GDP R ) and the price level (PL). LRAS. SRAS. PL. P. AD. Y F. GDP R. Full Employment. Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point. LRAS.

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AP Macroeconomics

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  1. AP Macroeconomics The AS/AD Model

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

  11. Decrease in SRAS SRAS1 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!!!

  13. 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.

  14. LRAS Price Level SRAS AD PL2 PLF AD2 Inflation AD1 YF Y2 Real GDP (GDPR) 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 ____ Output ____ Unemployment Problem:

  15. LRAS Price Level SRAS AD PLF PL2 Recession AD2 AD1 Y2 YF Real GDP (GDPR) 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 ____ Output ____ Unemployment Problem:

  16. SRAS2 LRAS AS Price Level SRAS1 PL2 PLF Stagflation AD Y2 YF Real GDP (GDPR) Cost-Push Inflation Practice Question #3 • 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? ____ ____ ____ Price Level ____ Output ____ Unemployment Problem:

  17. LRAS Price Level SRAS AD PLF PL1 Full Employment AD2 AD1 Y1 YF Real GDP (GDPR) 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 ____ Output ____ Unemployment Condition:

  18. LRAS Price Level SRAS AD PL1 PLF AD1 Full Employment? AD2 YF Y1 Real GDP (GDPR) Practice Question #5 • 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 ____ Output ____ Unemployment Condition:

  19. LRAS Price Level SRAS1 AS SRAS2 PLF PL2 AD YF Y2 Real GDP (GDPR) 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 ____ Output ____ Unemployment

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