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United StatesEconomics

Unit 3: National Income and Price Determination

9 dot points across 9 inquiry questions. Click any dot point for a focused answer with worked past exam questions where available.

Why does the aggregate demand curve slope downward, and what shifts it?

Topic 3.1 Aggregate Demand: define aggregate demand, explain the wealth, interest-rate, and exchange-rate effects that make it downward sloping, and identify the determinants that shift it.
A focused answer to AP Macroeconomics Topic 3.1, covering the definition of aggregate demand, the three reasons it slopes downward (the wealth, interest-rate, and exchange-rate effects), the components C plus I plus G plus net exports, and the determinants that shift the curve, with a worked graphing question.
12 min answer →

How do taxes and transfers stabilize the economy without any new legislation?

Topic 3.9 Automatic Stabilizers: explain how the progressive tax system and transfer payments automatically dampen the business cycle without discretionary action.
A focused answer to AP Macroeconomics Topic 3.9, covering automatic stabilizers, how progressive income taxes and transfer payments such as unemployment benefits dampen the business cycle automatically, and the contrast with discretionary fiscal policy, with a worked question.
10 min answer →

How do shocks to aggregate demand and short-run aggregate supply change output and the price level?

Topic 3.6 Changes in the AD-AS Model in the Short Run: trace how shifts in aggregate demand or short-run aggregate supply change the price level, real output, and unemployment in the short run.
A focused answer to AP Macroeconomics Topic 3.6, covering demand shocks and supply shocks in the short run, their effects on the price level, real output, and unemployment, and how to read the resulting output gaps, with a worked graphing question.
11 min answer →

How do aggregate demand and aggregate supply determine output, the price level, and output gaps?

Topic 3.5 Equilibrium in the AD-AS Model: locate short-run and long-run macroeconomic equilibrium, and identify recessionary and inflationary output gaps.
A focused answer to AP Macroeconomics Topic 3.5, covering short-run and long-run macroeconomic equilibrium, the relationship between short-run equilibrium and full-employment output, and how to identify recessionary and inflationary output gaps on the AD-AS graph, with a worked question.
11 min answer →

How does the government use spending and taxes to close output gaps?

Topic 3.8 Fiscal Policy: explain how expansionary and contractionary fiscal policy use government spending and taxes, with the multiplier, to close recessionary and inflationary output gaps.
A focused answer to AP Macroeconomics Topic 3.8, covering discretionary fiscal policy, expansionary and contractionary tools, using the spending and tax multipliers to size the policy needed to close an output gap, and the lags of fiscal policy, with full worked calculations.
12 min answer →

Why is long-run aggregate supply vertical at full-employment output, and what moves it?

Topic 3.4 Long-Run Aggregate Supply: explain why the long-run aggregate supply curve is vertical at full-employment (potential) output, and identify what shifts it.
A focused answer to AP Macroeconomics Topic 3.4, covering the vertical long-run aggregate supply curve, full-employment and potential output, the natural rate of unemployment, the link to the production possibilities curve, and the determinants of long-run growth, with a worked question.
11 min answer →

How does an economy return to full employment on its own after a shock?

Topic 3.7 Long-Run Self-Adjustment: explain how flexible wages and prices return the economy to full-employment output after a demand or supply shock, with no policy intervention.
A focused answer to AP Macroeconomics Topic 3.7, covering how the economy self-corrects from recessionary and inflationary gaps through flexible wages shifting short-run aggregate supply, the classical view, and the trade-off with active policy, with a worked graphing question.
11 min answer →

How does an initial change in spending produce a larger change in real GDP?

Topic 3.2 Multipliers: define the marginal propensities to consume and save, derive the spending and tax multipliers, and use them to calculate the total change in real GDP from a change in spending or taxes.
A focused answer to AP Macroeconomics Topic 3.2, covering the marginal propensity to consume and save, the spending multiplier, the tax multiplier, the balanced budget multiplier, and how to calculate the total change in real GDP, with full worked calculations.
12 min answer →

Why does short-run aggregate supply slope upward, and what shifts it?

Topic 3.3 Short-Run Aggregate Supply: explain why the short-run aggregate supply curve slopes upward using sticky wages and prices, and identify the determinants that shift it.
A focused answer to AP Macroeconomics Topic 3.3, covering the upward slope of short-run aggregate supply, sticky wages and prices and misperceptions, supply shocks, and the determinants that shift SRAS, with a worked graphing question.
11 min answer →