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## PowerPoint Slideshow about ' AP Macroeconomics' - orrin

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### AP Macroeconomics

The AS/AD Model

The AS/AD Model

- The equilibrium of AS & AD determines current output (GDPR) and the price level (PL)
- If equilibrium of AS & AD is ON LRAS:
- Unemployment is 3-4%
- Output is where it “should” be
- Also at a point ON the PPC

Full Employment

- Full Employment equilibrium exists where AD intersects SRAS & LRAS at the same point.

LRAS

SRAS

PL

P

AD

YF

GDPR

Recessionary Gap

- A recessionary gap exists when equilibrium occurs below full employment output.

SRAS

LRAS

PL

P

AD

Y

YF

GDPR

Inflationary Gap

- An inflationary gap exists when equilibrium occurs beyond full employment output.

LRAS

SRAS

PL

P

AD

YF

Y

GDPR

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%↓

Changes (Δ)in AD (cont)

- 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%↓

Increase in AD

SRAS

LRAS

PL

P1

P

AD1

AD

Y

YF

GDPR

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%↓

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%↑

Changes (Δ)in SRAS (cont)

- Δ Legal-Institutional Environment
- Deregulation .: SRAS .: GDPR↑ & PL↓ .: u%↓ & π%↓
- Regulation .: SRAS .: GDPR↓ & PL ↑ .: u%↑ & π%↑

Increase in SRAS

SRAS

LRAS

PL

SRAS1

P

P1

AD

Y

YF

GDPR

Input Prices↓, Productivity↑, and/or Deregulation

.: SRAS .: GDPR↑ & PL↓ .: u%↓ & π%↓

Decrease in SRAS

SRAS1

LRAS

PL

SRAS

P1

P

AD

Y1

YF

GDPR

Input Prices↑, Productivity↓, and/or Regulation/Business Taxes ↑

.: SRAS .: GDPR↓ & PL↑ .: u%↑ & π%↑

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%↑

Increase in G with an increase in Taxes increases AD. (Multiplier)

- The AS/AD Model is the most important graph in AP Macroeconomics.
- KNOW IT!!!

Assume the US economy is in a state of full employment.

- Draw a correctly labeled AS/AD graph showing representing that fact.
- Now suppose that private investment decreases. Show the effect of that decrease on your AS/AD graph.
- Explain the impact of the decrease in private investment.

Long-Run Aggregate Supply (LRAS)

- scenario to illustrate the point that we will always (hopefully) come back to LRAS and why/how LRAS is independent of price level
- To produce more than full employment output overtime is necessary.
- Input costs (labor) will go up
- When input costs are free to change, the high demand for them will start to raise input costs and lead to cost push inflation

Long-Run Aggregate Supply (LRAS)

- As input prices increase firms profits will fall until rise in input prices match the change in output prices.
- Firm profits return to original levels and firms will be motivated to produce at FE output level

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