ap macroeconomics the as/ad model frq – 2011 #1; 2011b #1; 2010 #1; 2010b #1; 2009b #1; 2008b #1;...
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AP MacroeconomicsThe AS/AD Model
FRQ – 2011 #1; 2011B #1; 2010 #1; 2010B #1; 2009B
#1; 2008B #1; 2007 #1; 2007B #1; 2006 #1; 2006B
#1
The AS/AD Model• The equilibrium of AS & AD
determines current output (GDPR) and the price level (PL)
GDPR
PL
AD
SRASLRAS
YF
P
Full Employment• Full Employment equilibrium exists
where AD intersects SRAS & LRAS at the same point.
GDPR
PL
AD
SRASLRAS
YF
P
Recessionary Gap• A recessionary gap exists when
equilibrium occurs below full employment output.
GDPR
PL
AD
SRASLRAS
YF
P
Y
Inflationary Gap• An inflationary gap exists when
equilibrium occurs beyond full employment output.
GDPR
PL
AD
SRASLRAS
YF
P
Y
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%↓
Increase in AD
C↑, IG↑, G↑ and/or XN↑ .: AD .: GDPR↑ & PL↑ .: u%↓ & π%↑
GDPR
PL
AD
SRASLRAS
YF
P
Y
AD1
P1
Decrease in AD
C↓, IG↓, G↓ and/or XN↓ .: AD .: GDPR↓ & PL↓ .: u%↑ & π%↓
GDPR
PL
AD
SRAS
LRAS
YF
P
Y
AD1
P1
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%↑
Increase in SRAS
Input Prices↓, Productivity↑, and/or Deregulation .: SRAS .: GDPR↑ & PL↓ .: u%↓ & π%↓
GDPR
PL
AD
SRASLRAS
YF
P
Y
SRAS1
P1
Decrease in SRAS
Input Prices↑, Productivity↓, and/or Regulation .: SRAS .: GDPR↓ & PL↑ .: u%↑ & π%↑
GDPR
PL
AD
SRAS
LRAS
YF
P
Y1
SRAS1
P1
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!!!
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.
Practice Question #1• Assume the economy is in equilibrium at full full
employmentemployment. If government spending (G) increasesgovernment 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
____ UnemploymentProblem:
PriceLevel
Real GDP (GDPR)
SRAS
AD1
PLF
YF
LRAS ADAD
ADAD22
PL2
Y2
Practice Question #2• Assume the economy is in equilibrium at full full employmentemployment. If consumer indebtedness risesconsumer indebtedness rises, what is the impact of the indebtedness on the price
level, output, and unemployment?• What economic condition or problem results?
PriceLevel
Real GDP (GDPR)
SRAS
AD1
PLF
YF
LRAS____ ____
____ Price Level
____ Output
____ UnemploymentProblem:
AD2
PL2
Y2
ADAD
Practice Question #3• Assume the economy is in equilibrium at full full
employmentemployment. If OPEC restricts the supply of oil and raises OPEC restricts the supply of oil and raises energy costs across the economyenergy costs across the economy, what is the impact of the higher production costs on price level, output, and unemployment?
• What economic problem/condition results?
PriceLevel
Real GDP (GDPR)
SRAS1
AD
PLF
YF
LRAS____ ____
____ Price Level
____ Output
____ UnemploymentProblem:
SRAS2
PL2
Y2
ASAS
Practice Question #4• Assume the economy is in a recessionrecession. If
government reduces personal income taxes,government reduces personal income taxes, what is the impact of the tax cut on price level, output, and unemployment?
• What economic condition may result?
PriceLevel
Real GDP (GDPR)
SRASLRAS
AD1
PL1
Y1
____ ____
____ Price Level
____ Output
____ UnemploymentCondition:
YF
ADAD22
PLF
ADAD
Practice Question #5• Assume the economy is overheated and experiencing
serious demand-pull inflation. If the FED increases the FED increases interest rates by reducing the money supply, 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?
PriceLevel
Real GDP (GDPR)
SRASLRAS
AD1
Y1
PL1
____ ____
____ Price Level
____ Output
____ UnemploymentCondition:
ADAD22
PLF
YF
ADAD
Practice Question #6• Assume the economy is in equilibrium at full full
employmentemployment. If productivity increasesproductivity increases due to technological developments, what is the impact of the increased productivity on the price level, output, and unemployment?
PriceLevel
Real GDP (GDPR)
SRAS1
AD
PLF
YF
LRAS____ ____
____ Price Level
____ Output
____ Unemployment
SRASSRAS22
PLPL22
YY22
ASAS