AP Macroeconomics, AP exams

Unit 3: National Income and Price Determination

Unit 3 builds the aggregate demand and aggregate supply model and uses it to analyze short-run fluctuations and long-run adjustment. Multipliers, output gaps, and fiscal policy all operate inside this framework. It is the single most important graph in the course.

Position: 3 of 6 units
Topics covered: 6 topics in this guide

What is covered

Topics inside this unit.

These topics describe the scope students most often review for this part of AP Macroeconomics. Treat them as a study checklist rather than an exhaustive list of what a single exam form can sample.

Aggregate demand: Why the aggregate demand curve slopes downward and the components and determinants that shift it.
Multipliers: The spending and tax multipliers, the marginal propensities to consume and save, and their effect on total output.
Short-run aggregate supply: Sticky wages and prices, and the input-cost and productivity determinants that shift short-run supply.
Long-run aggregate supply: Full-employment output, the vertical long-run curve, and the factors that shift potential output.
Equilibrium and output gaps: Short-run equilibrium, recessionary and inflationary gaps, and how the economy self-adjusts over time.
Fiscal policy: Discretionary spending and tax changes, automatic stabilizers, and the intended effects on output and the price level.

Study tips

How to practice AD-AS.

Section-specific guidance that follows from how this material is usually tested.

Draw the full AD-AS graph with both short-run and long-run curves in under a minute, correctly labeled.
For every shock, state the effect on output, unemployment, and the price level in that order.
Practice multiplier problems where the tax multiplier, not the spending multiplier, is required.

Where this fits

Unit 3: National Income and Price Determination is 3 of 6 units in the AP Macroeconomics guide. Use the full guide to balance it against everything else you have to review.

Back to the AP Macroeconomics guide Official exam information

Sample AD-AS questions

Practice questions, not yet expert-reviewed

Original practice questions written to the published framework for this section. No expert has reviewed them, and they are not taken from any official exam. Try each one before you open the answer.

Question 1Foundational
What happens to the aggregate demand curve when the federal government increases its spending on infrastructure, holding everything else constant?
1. AIt shifts to the right
2. BIt shifts to the left
3. CIt becomes vertical
4. DThe economy moves downward along the existing curve
Show answer
Answer: A. It shifts to the right
Government purchases are a component of aggregate demand, so raising them increases total spending at every price level and shifts the whole curve right. Moving along the curve is the tempting distractor, but movement along aggregate demand is caused by a change in the price level, not by a change in one of its spending components.
Key insight: A change in the price level moves you along aggregate demand; a change in consumption, investment, government purchases, or net exports shifts it.
Question 2Foundational
If the marginal propensity to consume is 0.8, what is the value of the spending multiplier?
1. A5
2. B4
3. C1.25
4. D0.8
Show answer
Answer: A. 5
The spending multiplier equals 1 divided by 1 minus the marginal propensity to consume, so 1 divided by 0.2 equals 5. The value 4 is the tempting distractor because it is the magnitude of the tax multiplier at this marginal propensity to consume, found by dividing 0.8 by 0.2.
Key insight: The tax multiplier is always one less in magnitude than the spending multiplier, because the first round of a tax cut is partly saved.
Question 3Intermediate
The marginal propensity to consume is 0.75 and the government cuts taxes by 100 billion dollars. By how much does aggregate demand change, ignoring crowding out?
1. AIt rises by 300 billion dollars
2. BIt rises by 400 billion dollars
3. CIt rises by 100 billion dollars
4. DIt rises by 75 billion dollars
Show answer
Answer: A. It rises by 300 billion dollars
The tax multiplier is the marginal propensity to consume divided by 1 minus that propensity, or 0.75 divided by 0.25, which is 3, so a 100 billion dollar tax cut raises aggregate demand by 300 billion. The 400 billion answer is the tempting distractor because it applies the spending multiplier of 4, which would be right for 100 billion in direct government purchases.
Key insight: A tax cut is weaker than equal government spending because households save part of it, so only the consumed share enters the spending stream.
Question 4Intermediate
An economy's short-run equilibrium output lies below its full-employment level of output. What is this situation called?
1. AA recessionary gap
2. BAn inflationary gap
3. CLong-run equilibrium
4. DA supply shock
Show answer
Answer: A. A recessionary gap
When actual output falls short of potential output the economy has a recessionary gap, with unemployment above its natural rate. An inflationary gap is the tempting distractor, but it is the mirror image, with output temporarily above potential and unemployment below the natural rate.
Key insight: Left unaided, a recessionary gap closes as nominal wages eventually fall and short-run aggregate supply shifts right, which is why the debate is about speed rather than direction.
Question 5Advanced
A sharp increase in world oil prices raises production costs throughout an economy. In the short run, what happens to real output and to the price level?
1. AOutput falls and the price level rises
2. BOutput falls and the price level falls
3. COutput rises and the price level rises
4. DOutput rises and the price level falls
Show answer
Answer: A. Output falls and the price level rises
Higher input costs shift short-run aggregate supply to the left, which moves the economy up along aggregate demand to lower output and a higher price level, the combination known as stagflation. Both falling together is the tempting distractor, but that pattern comes from a decrease in aggregate demand rather than from a negative supply shock.
Key insight: Demand shocks move output and prices in the same direction; supply shocks move them in opposite directions, which is what makes supply shocks so hard to treat with policy.

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Unit 3: National Income and Price Determination