AP MACROECONOMICS
UNIT 3 STUDY GUIDE
National Income and Price Determination
Everything you need to know for your Unit 3 test —
the AD-AS model, multipliers, and fiscal policy, aligned to the official College Board framework.
What's Inside
• 1. Unit Overview & The Big Picture
• 2. Key Concepts (Official College Board Framework)
• 3. Deep Dive: Aggregate Demand (AD)
• 4. Deep Dive: Short-Run & Long-Run Aggregate Supply
• 5. The AD-AS Model: Equilibrium, Gaps & Self-Adjustment
• 6. Multipliers: Spending & Tax
• 7. Fiscal Policy & Automatic Stabilizers
• 8. Full Vocabulary List — AD-AS & Fiscal Policy Terms
• 9. Key Formulas & Quick-Reference Calculations
• 10. Common Exam Traps & How to Avoid Them
• 11. Practice Questions
1. Unit Overview & The Big Picture
Unit 3, “National Income and Price Determination,” is the analytical engine of AP Macroeconomics and the single
highest-weighted unit on the exam, worth roughly 17–27% of the multiple-choice section. Every topic builds toward
one goal: using the AD-AS model to explain what happens to real GDP, the price level, and unemployment when
something in the economy changes.
The AD-AS model is the central graph of the entire AP Macro course. Once you can confidently draw it, shift
each curve correctly, and identify the resulting gap, you have the core tool needed for FRQs across Units 3, 4,
and 5.
This unit is graph-heavy and FRQ-heavy: expect to draw and label AD, SRAS, and LRAS curves, shift them based on a
described event, and explain the short-run and long-run consequences — including how fiscal policy or the economy's
own self-correction mechanism can close an output gap.
The 3 Things Your Teacher Wants You to Walk Away Knowing:
• Aggregate demand (AD) slopes downward due to three specific effects (real wealth, interest rate, and open
economy/exchange rate); short-run aggregate supply (SRAS) slopes upward due to sticky wages/prices; long-run
aggregate supply (LRAS) is VERTICAL at full-employment output.
• A $1 change in autonomous spending produces a LARGER change in real GDP through the multiplier effect —
you must be able to calculate the spending multiplier and the tax multiplier and know why they differ.
, • Fiscal policy (government spending and taxation) is one tool for closing a recessionary or inflationary gap in the
short run; in the long run, the economy tends to self-adjust back to full-employment output even without any
policy intervention.
2. Key Concepts (Official College Board Framework)
The College Board organizes Unit 3 into nine required topics (3.1–3.9).
Topic 3.1 — Aggregate Demand
• AD is the total quantity of goods and services demanded across the whole economy at each price level,
downward sloping due to the real-balance, interest rate, and open economy (exchange rate) effects.
Topic 3.2 — Multipliers
• The spending multiplier and tax multiplier quantify how much an initial change in spending or taxes ultimately
changes total real GDP, based on the marginal propensity to consume (MPC) and marginal propensity to save
(MPS).
Topic 3.3 — Short-Run Aggregate Supply
• SRAS slopes upward because sticky wages/prices mean producers respond to higher prices by increasing output
in the short run before input costs catch up.
Topic 3.4 — Long-Run Aggregate Supply
• LRAS is vertical at the full-employment (potential) level of output, reflecting the classical view that in the long
run, output is determined by resources and technology, not the price level.
Topic 3.5 — AD-AS Equilibrium
• Short-run equilibrium occurs where AD intersects SRAS; this equilibrium can occur at, above, or below the full-
employment level of output (LRAS).
Topic 3.6 — Changes in the AD-AS Model in the Short Run
• Demand shocks (shifts in AD) and supply shocks (shifts in SRAS) each move short-run equilibrium, changing real
GDP and the price level in predictable directions.
Topic 3.7 — Long-Run Self-Adjustment
• Without policy intervention, wage and price flexibility eventually returns the economy to long-run equilibrium at
full-employment output, closing recessionary or inflationary gaps over time.
Topic 3.8 — Fiscal Policy
• Expansionary fiscal policy (increased government spending, decreased taxes) is used to close a recessionary gap;
contractionary fiscal policy (decreased spending, increased taxes) is used to close an inflationary gap.
Topic 3.9 — Automatic Stabilizers
• Automatic stabilizers (like unemployment insurance and the progressive income tax) adjust automatically with
the business cycle, moderating fluctuations without requiring new legislation.
3. Deep Dive: Aggregate Demand (AD)
AD is downward sloping for three DIFFERENT reasons than the microeconomic demand curve — memorize all three
effects.
UNIT 3 STUDY GUIDE
National Income and Price Determination
Everything you need to know for your Unit 3 test —
the AD-AS model, multipliers, and fiscal policy, aligned to the official College Board framework.
What's Inside
• 1. Unit Overview & The Big Picture
• 2. Key Concepts (Official College Board Framework)
• 3. Deep Dive: Aggregate Demand (AD)
• 4. Deep Dive: Short-Run & Long-Run Aggregate Supply
• 5. The AD-AS Model: Equilibrium, Gaps & Self-Adjustment
• 6. Multipliers: Spending & Tax
• 7. Fiscal Policy & Automatic Stabilizers
• 8. Full Vocabulary List — AD-AS & Fiscal Policy Terms
• 9. Key Formulas & Quick-Reference Calculations
• 10. Common Exam Traps & How to Avoid Them
• 11. Practice Questions
1. Unit Overview & The Big Picture
Unit 3, “National Income and Price Determination,” is the analytical engine of AP Macroeconomics and the single
highest-weighted unit on the exam, worth roughly 17–27% of the multiple-choice section. Every topic builds toward
one goal: using the AD-AS model to explain what happens to real GDP, the price level, and unemployment when
something in the economy changes.
The AD-AS model is the central graph of the entire AP Macro course. Once you can confidently draw it, shift
each curve correctly, and identify the resulting gap, you have the core tool needed for FRQs across Units 3, 4,
and 5.
This unit is graph-heavy and FRQ-heavy: expect to draw and label AD, SRAS, and LRAS curves, shift them based on a
described event, and explain the short-run and long-run consequences — including how fiscal policy or the economy's
own self-correction mechanism can close an output gap.
The 3 Things Your Teacher Wants You to Walk Away Knowing:
• Aggregate demand (AD) slopes downward due to three specific effects (real wealth, interest rate, and open
economy/exchange rate); short-run aggregate supply (SRAS) slopes upward due to sticky wages/prices; long-run
aggregate supply (LRAS) is VERTICAL at full-employment output.
• A $1 change in autonomous spending produces a LARGER change in real GDP through the multiplier effect —
you must be able to calculate the spending multiplier and the tax multiplier and know why they differ.
, • Fiscal policy (government spending and taxation) is one tool for closing a recessionary or inflationary gap in the
short run; in the long run, the economy tends to self-adjust back to full-employment output even without any
policy intervention.
2. Key Concepts (Official College Board Framework)
The College Board organizes Unit 3 into nine required topics (3.1–3.9).
Topic 3.1 — Aggregate Demand
• AD is the total quantity of goods and services demanded across the whole economy at each price level,
downward sloping due to the real-balance, interest rate, and open economy (exchange rate) effects.
Topic 3.2 — Multipliers
• The spending multiplier and tax multiplier quantify how much an initial change in spending or taxes ultimately
changes total real GDP, based on the marginal propensity to consume (MPC) and marginal propensity to save
(MPS).
Topic 3.3 — Short-Run Aggregate Supply
• SRAS slopes upward because sticky wages/prices mean producers respond to higher prices by increasing output
in the short run before input costs catch up.
Topic 3.4 — Long-Run Aggregate Supply
• LRAS is vertical at the full-employment (potential) level of output, reflecting the classical view that in the long
run, output is determined by resources and technology, not the price level.
Topic 3.5 — AD-AS Equilibrium
• Short-run equilibrium occurs where AD intersects SRAS; this equilibrium can occur at, above, or below the full-
employment level of output (LRAS).
Topic 3.6 — Changes in the AD-AS Model in the Short Run
• Demand shocks (shifts in AD) and supply shocks (shifts in SRAS) each move short-run equilibrium, changing real
GDP and the price level in predictable directions.
Topic 3.7 — Long-Run Self-Adjustment
• Without policy intervention, wage and price flexibility eventually returns the economy to long-run equilibrium at
full-employment output, closing recessionary or inflationary gaps over time.
Topic 3.8 — Fiscal Policy
• Expansionary fiscal policy (increased government spending, decreased taxes) is used to close a recessionary gap;
contractionary fiscal policy (decreased spending, increased taxes) is used to close an inflationary gap.
Topic 3.9 — Automatic Stabilizers
• Automatic stabilizers (like unemployment insurance and the progressive income tax) adjust automatically with
the business cycle, moderating fluctuations without requiring new legislation.
3. Deep Dive: Aggregate Demand (AD)
AD is downward sloping for three DIFFERENT reasons than the microeconomic demand curve — memorize all three
effects.
