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AP Macroeconomics › Unit 3
AP Macroeconomics Unit 3: National Income and Price Determination
17 to 27% of the exam · 180 practice questions · 12 free-response questions
Here the AD-AS model takes center stage. You learn what shifts aggregate demand, short-run aggregate supply, and long-run aggregate supply, and how the spending and tax multipliers magnify a change in spending. Free-response questions often ask you to draw a correctly labeled AD-AS graph, show an output gap, and pick the fiscal policy that closes it. A frequent mistake is treating the tax multiplier as equal to the spending multiplier; it is smaller. Another is forgetting that, without policy, wages adjust and move the economy back to full employment.
Practice this unit
White belt covers core terms and foundational ideas, Regular is set at exam level, and Black belt has harder multi-step questions.
Topics in this unit
- 3.1 Aggregate Demand (AD) (23 questions)
- 3.2 Multipliers (20 questions)
- 3.3 Short-Run Aggregate Supply (SRAS) (18 questions)
- 3.4 Long-Run Aggregate Supply (LRAS) (12 questions)
- 3.5 Equilibrium in the AD-AS Model (17 questions)
- 3.6 Changes in the AD-AS Model in the Short Run (29 questions)
- 3.7 Long-Run Self-Adjustment (22 questions)
- 3.8 Fiscal Policy (28 questions)
- 3.9 Automatic Stabilizers (11 questions)
Free-response questions
- Recessionary Gap: Waiting or Fiscal Policy (Long question, 10 points)
- Inflationary Gap: Prices, Real Wages, and Adjustment (Long question, 10 points)
- Multipliers and Closing a Recessionary Gap (Short question, 5 points)
- Automatic Stabilizers in a Recession (Short question, 5 points)
- Three Events and Aggregate Demand (Short question, 5 points)
- Costs of Production and Short-Run Aggregate Supply (Short question, 5 points)
- Aggregate Demand and Supply Schedule (Short question, 5 points)
- Disposable Income and Consumption (Short question, 5 points)
- Closing an Inflationary Gap (Long question, 10 points)
- Investment Boom and Economic Growth (Long question, 10 points)
- A Positive Supply Shock: Cheaper Shipping (Short question, 5 points)
- Transfer Payments, Tax-Financed Purchases, and Policy Lags (Short question, 5 points)
Sample questions
These are taken from the Regular set, with the answer and explanation shown.
Topic 3.1 Aggregate Demand (AD)
1. Households expect a recession next year, so they begin saving a larger share of their current income. In the short run, which of the following is most likely?
- AAD increases, because more saving funds more investment
- BAD does not change, because income has not changed
- CAD decreases, because consumption spending falls
- DAD decreases, because imports rise
- ESRAS decreases, because firms expect lower sales
Answer: C. Saving a larger share of income means households spend less now. Consumption falls at every price level, so AD shifts left. The claim that more saving funds more investment is a long-run idea; in the short run, the drop in spending is what moves AD.
Common trap: Choosing "AD increases." Extra saving can fund investment over time, but in the short run the fall in consumption shifts AD to the left.
Topic 3.4 Long-Run Aggregate Supply (LRAS)
2. In the short run, some wages and input prices are fixed. In the long run, all wages and prices are flexible. Which of the following is a result of that long-run flexibility?
- AA change in the price level does not change the quantity of real output supplied
- BA rise in aggregate demand can keep output above full employment permanently
- CNominal wages stay constant while the price level changes
- DThe long-run aggregate supply curve slopes upward like SRAS
- EReal GDP changes whenever the price level changes
Answer: A. Once wages and other input prices fully adjust, a higher price level no longer makes extra output profitable. Output then depends only on resources and technology, so LRAS is vertical. A rise in AD can push output above full employment only for a while.
Common trap: Choosing that higher AD keeps output above full employment for good. Wages catch up, and output returns to LRAS.
Topic 3.8 Fiscal Policy
3. Which of the following is an example of a lag in discretionary fiscal policy?
- ACongress takes several months to debate and pass a spending bill
- BUnemployment benefits rise automatically during a recession
- CThe central bank takes time to change interest rates
- DTax revenues fall automatically when incomes fall
- EPrices adjust slowly to changes in demand
Answer: A. Discretionary fiscal policy requires deliberate action by the legislature, and debate and approval take time. Automatic changes in benefits and taxes are automatic stabilizers, which need no new legislation.
Common trap: Choosing automatic stabilizers. They work without new laws, so they avoid this lag.