Unit 3 Test: National Income and Price Determination

Test AP Macroeconomics Unit 3 skills. Practice AD-AS graph drawing, fiscal policy analysis, output gaps, and expenditure multiplier with College Board-style questions.

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Why Unit 3 Is Central to AP Macroeconomics

Unit 3 introduces the AD-AS model — the single most important analytical framework in AP Macroeconomics. Nearly every FRQ on the College Board-style exam involves drawing, shifting, or interpreting the aggregate demand and aggregate supply curves. Mastering this unit is essential for success on both MCQ and FRQ sections.

The Aggregate Demand Curve

The aggregate demand (AD) curve shows the relationship between the price level and the quantity of real GDP demanded. It slopes downward due to the wealth effect, the interest rate effect, and the net export effect. Determinants that shift AD include changes in consumer wealth, investment expectations, government spending, taxes, and net exports.

Aggregate Supply: Short Run and Long Run

Short-Run Aggregate Supply (SRAS) — Slopes upward because some input prices (especially wages) are sticky in the short run. SRAS shifts when input costs change, productivity changes, or supply shocks occur.
Long-Run Aggregate Supply (LRAS) — Vertical at the full-employment level of output (potential GDP). It shifts only when the productive capacity of the economy changes — through changes in resources, technology, or institutions.

Equilibrium and Output Gaps

Short-run macroeconomic equilibrium occurs where AD intersects SRAS. When this equilibrium is below potential GDP, the economy faces a recessionary gap. When it is above potential GDP, the economy faces an inflationary gap. AP FRQs frequently ask you to identify the type of gap and then analyze the appropriate policy response.

Drawing the AD-AS Graph

To earn full credit on AP FRQs, your AD-AS diagram must include a correctly labeled vertical axis (price level, abbreviated PL) and horizontal axis (real GDP or output), a downward-sloping AD curve, an upward-sloping SRAS curve, a vertical LRAS curve, and a clearly marked equilibrium point. Curve shifts must be shown with arrows.

Fiscal Policy and the Expenditure Multiplier

Fiscal policy uses government spending and taxation to influence aggregate demand. An increase in government spending shifts AD to the right. The expenditure multiplier amplifies the initial spending change: multiplier = 1 / (1 - MPC), where MPC is the marginal propensity to consume. AP questions frequently ask students to calculate the multiplier or the total change in GDP from a given spending change.

Recessionary vs Inflationary Gap Responses

In a recessionary gap, expansionary fiscal policy (increase G or decrease T) shifts AD right to restore full employment.
In an inflationary gap, contractionary fiscal policy (decrease G or increase T) shifts AD left to reduce inflationary pressure.

Frequently asked questions

The Unit 3 test covers the aggregate demand and aggregate supply model, the multiplier effect, and short-run versus long-run equilibrium. This is one of the most important units because the AD-AS model is used throughout the rest of AP Macroeconomics to analyze fiscal and monetary policy effects.

The AD-AS model is the central framework for analyzing macroeconomic events and policy on the AP exam. FRQs frequently ask you to draw AD-AS diagrams, show shifts from fiscal or monetary policy, and explain the resulting changes in output and price level. Mastering this model is essential for strong FRQ performance.

Practice calculating the spending multiplier and tax multiplier using the marginal propensity to consume. Understand how initial changes in spending or taxation produce larger changes in GDP through the multiplier process. Common errors include confusing spending and tax multiplier formulas or applying the multiplier to the wrong initial change amount.

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