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Unit 3 · National Income & Price Determination Unit Hub Flashcards Cheat Sheet Essentials Visual Review MC Practice FRQ Practice

AP Macroeconomics Unit 3 Visual Review

An 8-slide visual review of National Income & Price Determination — the AD/AS model, the multiplier, equilibrium gaps, and fiscal policy, built right into the page.

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UNIT 3 · SLIDE 1 The AD–AS Model — Macro's Master Graph AD SRAS LRAS PL₁ Price level Real GDP (Y) Why AD slopes downward • Wealth effect — higher PL → savings buy less → C↓ • Interest-rate effect — higher PL → rates rise → I↓ • Exchange-rate effect — higher PL → exports fall → Xn↓ AD plots total spending (C + I + G + Xn) at each price level The two supply curves SRAS slopes up — wages & input prices are STICKY, so a higher price level raises profit margins short-run. LRAS is VERTICAL at full-employment output (Yf) — in the long run, prices don't change what we CAN make. Long-run equilibrium = AD and SRAS intersect ON the LRAS line — actual output equals potential. The Review Hub · AP Macroeconomics Unit 3
Three curves: downward AD (wealth, interest-rate, exchange-rate effects), upward SRAS (sticky wages), and vertical LRAS at full employment. Every Unit 3 question starts from this graph.
UNIT 3 · SLIDE 2 What Shifts Each Curve AD shifters C — confidence, wealth, taxes I — business optimism, rates G — government purchases Xn — foreign income, FX rates Any change in C, I, G, or Xn NOT caused by the price level More spending → AD right SRAS shifters Input & commodity prices Wages (sticky, but they move) Productivity & technology Inflation expectations Supply shocks (oil spike) shift SRAS left → stagflation Lower costs → SRAS right LRAS shifters More resources (land, labor, capital stock) Better technology More human capital Same forces that shift the PPC outward = economic growth Growth → LRAS right LRAS shifts drag SRAS along with them — potential output moved, so short-run capacity moved too. Exam trap: a change in the price level NEVER shifts AD or AS — it moves you along the curve. The Review Hub · AP Macroeconomics Unit 3
AD shifts with any non-price change in C, I, G, or Xn. SRAS shifts with production costs and expectations. LRAS shifts only with growth — the same forces that move the PPC.
UNIT 3 · SLIDE 3 The Multipliers MPC + MPS = 1 Spending multiplier = 1 ÷ MPS (= 1 ÷ (1 − MPC)) MPC = 0.8 → multiplier = 1 ÷ 0.2 = 5 $100B new G → up to $500B more GDP Each round of spending becomes someone's income, and they spend MPC of it again. Tax multiplier = −MPC ÷ MPS MPC = 0.8 → tax multiplier = −4 $100B tax CUT → up to $400B more GDP Weaker than spending: the first round of a tax cut gets partly SAVED, not spent. Multiplier effects are maximums — they assume no crowding out and no price-level rise. FRQ math: max ΔGDP = initial change × multiplier — and the tax multiplier is always smaller and opposite-signed. The Review Hub · AP Macroeconomics Unit 3
Spending multiplier = 1/MPS; tax multiplier = −MPC/MPS. With MPC = 0.8 they're 5 and −4 — equal government spending always moves GDP more than an equal-sized tax change.
UNIT 3 · SLIDE 4 Recessionary Gap — Output Below Potential Y₁ Yf AD SRAS LRAS gap What you're looking at Equilibrium output Y₁ is LEFT of full employment Yf. The economy is producing below potential — cyclical unemployment exists. Three ways out 1. Expansionary FISCAL policy — ↑G or ↓taxes → AD right 2. Expansionary MONETARY policy — Fed cuts rates → I and C rise → AD right 3. Wait — wages eventually fall → SRAS right (Slide 6) Policy closes the gap faster but risks overshooting into inflation. Recessionary gap: Y₁ < Yf — low output, high unemployment, downward pressure on prices. The Review Hub · AP Macroeconomics Unit 3
When AD ∩ SRAS lands left of LRAS, output is below potential and cyclical unemployment appears. Fix it with expansionary fiscal or monetary policy — or wait for wages to adjust.
UNIT 3 · SLIDE 5 Inflationary Gap — Output Above Potential Y₁ Yf AD SRAS LRAS gap What you're looking at Equilibrium output Y₁ is RIGHT of full employment Yf. Unemployment is BELOW its natural rate — the economy is overheating and prices climb. How to cool it down 1. Contractionary FISCAL — ↓G or ↑taxes → AD left 2. Contractionary MONETARY — Fed raises rates → I and C fall → AD left 3. Wait — wages rise → SRAS left, back to Yf higher PL "Overheating" can't last — resources are stretched past capacity. Inflationary gap: Y₁ > Yf — unemployment below natural rate, upward pressure on prices. The Review Hub · AP Macroeconomics Unit 3
When equilibrium lands right of LRAS, output exceeds potential and unemployment dips below the natural rate — unsustainable. Contractionary policy (or rising wages) pulls it back.
UNIT 3 · SLIDE 6 Long-Run Self-Adjustment SRAS₁ SRAS₂ AD LRAS start: gap end: back at Yf Healing a recessionary gap High unemployment → workers accept lower wages → production costs fall → SRAS shifts RIGHT → output returns to Yf at a LOWER price level. (That's the diagram on the left.) Healing an inflationary gap Tight labor market → wages get bid UP → costs rise → SRAS shifts LEFT → back to Yf at a HIGHER price level. Why it's slow: wages are sticky (contracts, morale). The policy debate is whether to wait or intervene. ⏳ In the long run, flexible wages pull output back to potential — only the price level ends up different. The Review Hub · AP Macroeconomics Unit 3
Gaps close on their own through wage adjustment: recession → wages fall → SRAS right; boom → wages rise → SRAS left. Output always returns to Yf — the question is how long you're willing to wait.
UNIT 3 · SLIDE 7 Fiscal Policy — Congress's Toolkit Expansionary — fight recession ↑ Government spending · ↓ Taxes · ↑ Transfers → AD shifts RIGHT → Y↑, PL↑, unemployment↓ Side effect: bigger deficit → borrowing → crowding out (Unit 5) Contractionary — fight inflation ↓ Government spending · ↑ Taxes · ↓ Transfers → AD shifts LEFT → PL↓, Y↓, unemployment↑ Politically painful — rarely chosen on purpose Automatic stabilizers Work WITHOUT new laws: progressive income taxes, unemployment insurance, welfare programs. Recession → taxes fall & transfers rise automatically → cushions AD Discretionary policy & its lags New legislation (stimulus bills) takes time: recognition lag → decision lag → implementation lag. Badly timed stimulus can hit AFTER the recession ends Sizing the fix: needed AD shift = output gap; initial spending change = gap ÷ multiplier Example: $100B recessionary gap, multiplier 5 → increase G by just $20B Match the policy to the gap: recessionary → expansionary; inflationary → contractionary. The Review Hub · AP Macroeconomics Unit 3
Expansionary fiscal policy shifts AD right; contractionary shifts it left. Automatic stabilizers act instantly without legislation, while discretionary policy suffers recognition, decision, and implementation lags.
UNIT 3 · SLIDE 8 Unit 3 Quick Reference — Know These Cold Multiplier math Spending multiplier = 1 ÷ MPS Tax multiplier = −MPC ÷ MPS · MPC + MPS = 1 Max ΔGDP = initial change × multiplier Tax changes always move GDP LESS than spending Gap diagnosis Y₁ left of LRAS → recessionary → expansionary policy Y₁ right of LRAS → inflationary → contractionary On LRAS → long-run equilibrium, leave it alone Always draw all three curves + label the gap Shift cheat sheet AD: C, I, G, Xn changes (not price level) SRAS: input costs, productivity, expectations LRAS: resources, technology, human capital Supply shock left = stagflation (P↑ Y↓) Self-adjustment story Recession → wages fall → SRAS right → Yf, lower PL Boom → wages rise → SRAS left → Yf, higher PL Fiscal policy is the faster (but riskier) route Only the price level differs in the long run Unit 3 is 17–27% of the exam — the AD/AS graph with a labeled gap is the most common FRQ opener. The Review Hub · AP Macroeconomics Unit 3
Multiplier formulas, gap diagnosis, the shift lists, and the self-adjustment story — Unit 3 in four boxes. Practice drawing the three-curve graph until it takes under 30 seconds.
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How to use the visual review

Spend 30 seconds per step before clicking next. Look at the diagram, then ask yourself: "Could I sketch this from memory and label every part?"

Use the dots below the diagram to jump straight to any step, or the arrow keys to move forward and back.

This is great for review the night before the exam — fast, visual, and covers every core AD/AS diagram you need to remember from Unit 3.