A one-page visual summary of National Income & Price Determination — every key topic, term, and theme you need to know for the exam, on a single screen.
What it covers: The AD/AS model — how aggregate demand and aggregate supply interact to determine the price level and real GDP, plus the multiplier effect and fiscal policy.
Exam weight: About 17–27% of the AP Macroeconomics exam — the single largest unit.
The big question: How do aggregate demand and aggregate supply interact in the short run and long run, and how can fiscal policy shift the outcome?
Big Ideas covered: Markets, Multiplier Effects, Self-Correction, and Policy Tradeoffs.
Key topics at a glance
Aggregate Demand
Downward-sloping due to the wealth, interest rate, and trade effects. Shifts from changes in C, I, G, or Nx.
The Multiplier Effect
Spending multiplier = 1 ÷ MPS.Tax multiplier = −MPC ÷ MPS (smaller in magnitude — taxes are filtered through MPC first).
SRAS
Upward-sloping because input prices are sticky in the short run. Shifts from input costs, productivity, and expectations.
LRAS
Vertical at potential GDP. Shifts only with more/better resources or technology — same drivers as PPC growth.
Short-Run Equilibrium
Where AD meets SRAS. Can sit above, at, or below potential GDP — creating an inflationary gap, full employment, or a recessionary gap.
Recessionary & Inflationary Gaps
Recessionary gap: equilibrium GDP < potential GDP. Inflationary gap: equilibrium GDP > potential GDP.
Long-Run Self-Adjustment
Wage flexibility shifts SRAS over time, automatically closing gaps and returning the economy to potential GDP — no policy required.
Fiscal Policy
Expansionary: ↑G or ↓T to fight recession. Contractionary: ↓G or ↑T to fight inflation. Watch for crowding out.
The key terms you must know
Aggregate demand (AD) — total spending on domestic output at each price level; slopes downward.
SRAS / LRAS — short-run supply (upward-sloping, sticky prices) vs. long-run supply (vertical at potential GDP).
MPC / MPS — the fraction of extra income spent vs. saved; MPC + MPS = 1.
Recessionary gap / inflationary gap — equilibrium GDP below or above potential GDP.
Expansionary / contractionary fiscal policy — using G and T to shift AD in either direction.
Crowding out — government borrowing raising interest rates and reducing private investment.
Automatic stabilizers — unemployment insurance and progressive taxes that respond to the cycle without new legislation.
Key themes to remember
The AD/AS model is the lens for the whole course. Almost every later policy discussion (Units 4 and 5) is interpreted through shifts in this model.
A dollar of spending becomes more than a dollar of total spending. The multiplier effect means initial changes ripple through the economy.
The economy self-corrects in the long run — but it takes time. Policy exists partly because waiting for self-correction has real costs (prolonged unemployment or inflation).
Every fiscal tool has a tradeoff. Expansionary policy fights recessions but risks crowding out and larger deficits; contractionary policy fights inflation but risks slowing growth.
Common exam traps
Don't confuse SRAS and LRAS. SRAS is upward-sloping and shifts with costs; LRAS is vertical and only shifts with real resource/technology changes.
The tax multiplier is smaller than the spending multiplier in magnitude. A common error is treating them as equal — remember the −MPC ÷ MPS formula.
A recessionary gap is not the same as a recession. A recessionary gap just means equilibrium GDP is below potential — it can exist without two quarters of GDP decline.
Long-run self-adjustment happens through SRAS shifting, not AD shifting. Wage and price flexibility move the supply side, not the demand side.
Crowding out partially offsets, but doesn't always fully cancel, expansionary fiscal policy. Don't assume it eliminates the multiplier effect entirely.