#AP Macroeconomics: Night Before Review 🚀

Hey! Let's make sure you're feeling super confident for your AP Macro exam tomorrow. We're going to break down the key concepts, link them together, and get you ready to rock this test. Let's dive in!

#1. Aggregate Demand (AD) and Aggregate Supply (AS) 📈

#1.1. What Shifts the Curves?

Understanding what moves the AD and AS curves is crucial. Remember, these shifts change the whole economy!

• Aggregate Demand (AD): Total demand for goods and services in an economy at a given price level.
  • Formula: AD = C + I + G + (X-M) (Consumer spending + Investment + Government spending + Net Exports)

* **Consumer Spending (C):** Changes in consumer confidence, income, taxes. * **Investment Spending (I):** Changes in interest rates, business confidence, technology. * **Government Spending (G):** Changes in government purchases of goods and services. * **Net Exports (X-M):** Changes in global demand, exchange rates.

• Aggregate Supply (AS): Total supply of goods and services in an economy at a given price level.
  • Short-Run Aggregate Supply (SRAS): The relationship between the price level and the quantity of goods and services firms are willing to supply in the short run.

* **Resource Prices:** Changes in the cost of labor, raw materials, energy. * **Government Actions:** Changes in taxes, subsidies, regulations. * **Productivity/Technology:** Changes in efficiency, innovation.

#1.2. Supply Shocks: The Unexpected Twists

Supply shocks are sudden events that can throw the economy for a loop.

• Negative Supply Shock: 📉

  • Unexpected decrease in resource availability (e.g., oil crisis).
  • Increases production costs, decreases SRAS (shifts left).
  • Example: 1970s oil crisis (OPEC embargo).

• Positive Supply Shock: 📈

  • Unexpected increase in resource availability (e.g., tech boom).
  • Decreases production costs, increases SRAS (shifts right).
  • Example: Internet boom of the late 1990s.

#2. AD-AS Model: Scenarios and Impact 🧐

Let's walk through some common scenarios and see how they affect the AD-AS model. Remember, the goal is to understand the why behind the shifts and their effects on price level and real GDP.

#

• AD⬆: Real GDP⬆, Unemployment⬇, Price Level⬆
• AD⬇: Real GDP⬇, Unemployment⬆, Price Level⬇
• SRAS⬆: Real GDP⬆, Unemployment⬇, Price Level⬇
• SRAS⬇: Real GDP⬇, Unemployment⬆, Price Level⬆

#2.2. Scenario Breakdown

#Scenario #1: Consumer Income Decreases (Taxes Increase)

• What Happens: Higher taxes reduce disposable income, decreasing consumer spending (C).
• AD Shift: AD curve shifts left (decreases).
• Impact: Price level decreases, real GDP decreases.

#Scenario #2: Tariffs on Imported Inputs Increase

• What Happens: Tariffs increase the cost of resources for firms.
• SRAS Shift: SRAS curve shifts left (decreases).
• Impact: Price level increases, real GDP decreases.

#Scenario #3: Exports Become Cheaper

• What Happens: Cheaper exports increase foreign demand, increasing net exports (X-M).
• AD Shift: AD curve shifts right (increases).
• Impact: Price level increases, real GDP increases.

#Scenario #4: Corporate Taxes are Reduced

• What Happens: Lower taxes decrease production costs for firms.
• SRAS Shift: SRAS curve shifts right (increases).
• Impact: Price level decreases, real GDP increases.

#3. Final Exam Focus 🎯

Alright, let's zero in on what's most likely to show up on your exam:

• High-Priority Topics: * AD and SRAS shifters: Know them cold. Practice identifying what shifts which curve. * Supply shocks: Understand the difference between positive and negative shocks and their impact. * Impact of fiscal policy (taxes, government spending) on AD and SRAS. * Interpreting AD-AS graphs: Be able to analyze the effects of shifts on price level and real GDP.

* Multiple Choice: Expect questions that ask you to identify the shifters of AD and SRAS, or the impact of shifts on the economy. * Free Response Questions (FRQs): Be prepared to draw and explain AD-AS diagrams, and analyze the effects of policy changes or economic shocks.

* **Time Management:** Don't spend too long on any one question. If you're stuck, move on and come back later. * **FRQ Structure:** Clearly label your graphs and explain your reasoning step-by-step. * **Avoid Common Pitfalls:** Double-check your work, and make sure you understand the difference between movements *along* a curve and shifts *of* a curve.

#4. Practice Questions

Practice Question

#Multiple Choice Questions

1. Which of the following would cause a decrease in aggregate demand? (A) An increase in government spending (B) A decrease in consumer confidence (C) A decrease in interest rates (D) An increase in net exports (E) A decrease in taxes

2. A negative supply shock would most likely result in: (A) A decrease in both price level and real GDP (B) An increase in both price level and real GDP (C) A decrease in price level and an increase in real GDP (D) An increase in price level and a decrease in real GDP (E) No change in either price level or real GDP

3. If the government increases taxes and decreases government spending, what will be the most likely impact on the AD-AS model? (A) Aggregate demand will increase, and aggregate supply will decrease (B) Aggregate demand will decrease, and aggregate supply will increase (C) Aggregate demand will decrease, and aggregate supply will remain constant (D) Aggregate demand will remain constant, and aggregate supply will decrease (E) Aggregate demand will decrease, and aggregate supply will also decrease

#Free Response Question

Assume the economy is initially in long-run equilibrium. Draw a correctly labeled graph of the aggregate demand and aggregate supply curves. Show the effect of a significant increase in government spending on the economy in the short run. Clearly label the new equilibrium point. Explain the impact on price level and real GDP.

Scoring Guidelines

• (1 point) Correctly labeled AD-AS graph with initial equilibrium (PL1, Y1).
• (1 point) Rightward shift of the AD curve.
• (1 point) New equilibrium point (PL2, Y2) with higher price level and real GDP.
• (1 point) Explanation that the increase in government spending shifts the AD curve to the right.
• (1 point) Explanation that the shift in AD leads to an increase in both price level and real GDP in the short run.

You've got this! Remember, you've put in the work, and now it's time to show off what you know. Go get 'em! 💪