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AP Macroeconomics AD-AS Model and Policy Cheat Sheet
A printable reference covering aggregate demand, short-run aggregate supply, long-run aggregate supply, output gaps, fiscal policy, and monetary policy for grades 11-12.
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The AD-AS model explains how the overall price level and real GDP are determined in the macroeconomy. AP Macroeconomics students use this model to analyze recessions, inflation, supply shocks, and stabilization policy. This cheat sheet helps organize the curves, shifts, equilibrium outcomes, and policy tools that appear often on graphs and free-response questions. Aggregate demand shows total spending, short-run aggregate supply shows production at different price levels, and long-run aggregate supply marks potential output. Changes in spending, input costs, productivity, taxes, government purchases, and money supply shift the curves. The most important skills are identifying the shock, drawing the correct shift, naming the output gap, and choosing the appropriate fiscal or monetary policy response.
Key Facts
- Macroeconomic equilibrium occurs where AD intersects SRAS, determining the short-run price level and real GDP.
- Long-run equilibrium occurs when AD, SRAS, and LRAS intersect at the same real GDP level, so actual output equals potential output.
- AD = C + I + G + Xn, where C is consumption, I is investment, G is government purchases, and Xn is net exports.
- An increase in AD raises the price level and real GDP in the short run, while a decrease in AD lowers the price level and real GDP in the short run.
- A negative supply shock shifts SRAS left, causing higher inflation and lower real GDP, which is called stagflation.
- A recessionary gap occurs when real GDP is less than potential GDP, so unemployment is above the natural rate.
- An inflationary gap occurs when real GDP is greater than potential GDP, so unemployment is below the natural rate.
- Expansionary policy increases AD, while contractionary policy decreases AD to reduce inflationary pressure.
Vocabulary
- Aggregate Demand
- Aggregate demand is the total quantity of goods and services demanded at each price level in an economy.
- Short-Run Aggregate Supply
- Short-run aggregate supply is the total quantity of goods and services firms are willing to produce at each price level when some input prices are sticky.
- Long-Run Aggregate Supply
- Long-run aggregate supply is the level of real GDP an economy can produce when resources are fully employed.
- Recessionary Gap
- A recessionary gap occurs when actual real GDP is below potential real GDP.
- Inflationary Gap
- An inflationary gap occurs when actual real GDP is above potential real GDP.
- Stabilization Policy
- Stabilization policy is the use of fiscal or monetary tools to move the economy closer to full employment output.
Common Mistakes to Avoid
- Shifting AD when only the price level changes is wrong because movement along AD happens when the price level changes, while AD shifts when a spending component changes.
- Confusing SRAS and LRAS is wrong because SRAS can slope upward in the short run, while LRAS is vertical at potential real GDP.
- Using expansionary policy during an inflationary gap is wrong because expansionary policy increases AD and can make demand-pull inflation worse.
- Ignoring the price level effect of supply shocks is wrong because a leftward SRAS shift raises the price level while lowering real GDP.
- Labeling every recession as a supply problem is wrong because many recessions are caused by falling AD, which lowers both real GDP and the price level.
Practice Questions
- 1 If AD shifts right from real GDP 18 trillion to 19 trillion while potential GDP is 18 trillion, what type of output gap occurs?
- 2 Suppose government spending increases by 200 billion and the spending multiplier is 4. What is the expected change in aggregate demand?
- 3 If oil prices rise sharply, which curve shifts, in what direction, and what happens to the price level and real GDP in the short run?
- 4 Explain why a central bank might choose contractionary monetary policy even if higher interest rates could slow real GDP growth.