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AP Macroeconomics

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. LRAS – Long run aggregate supply.

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AP Macroeconomics

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  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. LRAS – Long run aggregate supply • The LRAS curve is a vertical line at an output level that represents the quantity of goods and services a nation can produce over a sustained period using all of its productive resources as efficiently as possible. LRAS = FE = Yf

  3. LRAS – cont. • Developing more and better resources or improving technology will shift the LRAS curve outward, but it will still be vertical. • The LRAS curve represents a point on an economy’s production possibilities curve.

  4. The AS/AD Model • “Assume the economy is at equilibrium” of AS & AD determines current output (GDPR) and the price level (PL) LRAS SRAS PL P AD YF GDPR

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

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

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

  8. 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%↓

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

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

  11. 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%↑

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

  13. Decrease in SRAS SRAS1 LRAS PL SRAS  P1  P AD  Y1 YF GDPR Input Prices↑, Productivity↓, and/or Regulation .: SRAS  .: GDPR↓ & PL↑ .: u%↑ & π%↑

  14. [“bad news” – job losses; “bad news” – inflation] Adverse Supply Shock AS2 LRAS AS1 AD 10% The economy is stagnating but inflating Inflating 2. 1. PL1 “Stagflation” Stagnating 10% Y*

  15. 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!!!

  16. 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.

  17. 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:

  18. 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:

  19. 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:

  20. 1970’s Gas Crisis

  21. 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:

  22. 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:

  23. 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

  24. AC/DC MACROECONOMICS • http://www.youtube.com/watch?v=pOQWm4hS5uI • http://apcentral.collegeboard.com/apc/public/repository/_ap05_frq_macro_b_45732.pdf • http://apcentral.collegeboard.com/apc/public/repository/_ap05_frq_macro_econo_45731.pdf

  25. Practice AP FRQ’s • http://apcentral.collegeboard.com/apc/public/repository/ap04_frq_macro_36231.pdf • http://apcentral.collegeboard.com/apc/public/repository/ap03_frq_econ_macro_23130.pdf

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