Name: ________________________________________
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AP Macroeconomics Unit 3 Problem Set
Concept Group 1: Aggregate Demand
Video Lessons:
 Aggregate Demand: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supplydemand-topic/aggregate-supply-demand-tut/v/aggregate-demand
 Shifts in Aggregate Demand: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/aggregate-supply-demand-tut/v/shifts-in-aggregate-demand
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Define the term aggregate.
Define aggregate demand.
What is the formula for aggregate demand?
What is the relationship between price level and real GDP?
Draw and fully label an aggregate demand curve.
Why is aggregate demand downward sloping?
Explain the real-balance effect.
Explain the interest rate effect.
Explain the foreign trade effect.
List and fully explain the four shifters of aggregate demand.
Explain how changes in the price level affect the curve.
Draw and fully label a graph showing an increase in aggregate demand.
Draw and fully label a graph showing a decrease in aggregate demand.
Concept Group 2: Aggregate Supply
Video Lessons:
 Short-Run Aggregate Supply: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/aggregate-supply-demand-tut/v/short-run-aggregate-supply
 Long-Run Aggregate Supply: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/aggregate-supply-demand-tut/v/long-run-aggregate-supply
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Define aggregate supply.
Define full employment.
Explain the difference between short- and long-run aggregate supply.
What happens in the short-run if prices increase?
Draw and fully label a short-run aggregate supply curve.
List and fully explain the four shifters of aggregate supply.
What happens in the long-run if prices increase? Why?
Draw and fully label a long-run aggregate supply graph.
Fully explain why LRAS is vertical in the long-run.
Complete the chart below:
Scenario
A
B
C
D
E
F
G
H
I
J
K
L
AD or AS
increase or
decrease
How will real
GDP be
affected?
How will the
price level be
affected?
A decrease in consumer spending.
The impact on net exports caused by increases in national incomes of our
major trading partners.
A large increase in the price of imported oil which impacts the resource
costs of businesses.
A large increase in government spending on our highway system.
A substantial increase in the wages that businesses pay their workers.
The effect on investment if there are negative business expectations.
A decrease in interest rates even though there is no change in price level.
The government paying the tuition for all the nation’s private school
students who earned a 90% or above in economics.
A major increase in worker productivity.
The effects of a 25% stock market increase over a two-month period.
Increase in labor productivity
Decrease in corporate income taxes
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Concept Group 3: AD & AS Equilibrium
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Draw and fully label a graph that shows AS, AD, and LRAS in equilibrium.
Define inflationary gap.
Define recessionary gap.
Draw a graph that shows AS, AD, and LRAS in equilibrium. Then show the impact on AD after the government
significantly increases spending. What kind of gap is created?
28. Draw a graph that shows AS, AD, and LRAS in equilibrium. Then show the impact on AS following a long-term
negative oil supply shock. What kind of gap is created?
29. Complete the following scenarios:
The Change
AD/AS Model
The Result
1. Before: Label the point at original
equilibrium QY
1. Calvin, and other children, convince their
parents to purchase more “big ticket” items for
the Holidays.
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
2. The effect on production when a 5% excise tax
is placed on several resources.
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
2. Shifter
3. A large purchase of U.S. wheat by Russia
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
2. Shifter
4. A cut in Federal spending for Health Care
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
5. The complete disintegration of OPEC causing
oil prices to fall
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
2
1. Before: Label the point at original
equilibrium QY
2. Shifter
6. A 10% decrease in personal income tax rates
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
2. Shifter
7. A significant increase in labor productivity
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
8. A severe recession in a country that imports
many U.S. products.
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
9. The effect on investment when the
government increases the money supply
causing interest rates to fall.
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
10. Widespread fear of depression on the part of
consumers
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
1. Before: Label the point at original
equilibrium QY
11. To stimulate the economy, the government
increases spending on public works programs.
2. Shifter
3. After: Label the point after the shift
Q1
4. Gap:
3
1. Before: Label the point at original
equilibrium QY
2. Shifter
12. A 12% decrease in nominal wages.
3. After: Label the point after the shift
Q1
4. Gap:
30. Complete the chart below:
Scenario
Impact on
Short-Run Price
Level
Impact on
Short-Run Real
GDP
Impact on
Unemployment in
the Short Run
Impact on
Long-Run
Price Level
Impact on
Long-Run
Real GDP
AD increases
AD decreases
AS increases
AS decreases
AD increases, AS
increases
AD increases, AS
decreases
AD decreases, AS
increases
AD decreases, AS
decreases
31. Show the shifts in AD and AS toward new equilibrium in the following scenarios for the US economy:
a. Consumer spending falls suddenly because of fears of a financial crisis.
b. Due to major tax cuts, Chinese purchases of US exports increases significantly.
c. The US government initiates a new project of highway expansion.
32. Show the shift of the LRAS in response to these scenarios:
a. The US promises a free college education to all US citizens over the next 20 years.
b. Steel, which is widely used in US factories, becomes extremely expensive due to shortages, and prices continue
to climb for many years.
Concept Group 4: Classical v. Keynesian Economics
Video Lessons:
 Keynesian Economics: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregate-supplydemand-topic/keynesian-thinking/v/keynesian-economics
 Risks of Keynesian Thinking: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/keynesian-thinking/v/risks-of-keynesian-thinking
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Write a short biography of John Maynard Keynes (3-5 sentences).
Write a short biography of Adam Smith (3-5 sentences).
Why is LRAS vertical in the long-run?
What could shift AD?
Draw a classical model of the macroeconomy, and explain the following:
a. If AD shifts, and LRAS does not, what is the result?
b. In order to achieve economic growth in the classical model, what must shift? How?
c. What could shift LRAS?
d. Explain “supply-side economics.”
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38. Draw a Keynsian model in the “very short run” and explain why the LRAS curve would become horizontal.
a. Explain “sticky prices.”
b. In order to achieve economic growth according to Keynes, what must shift? How?
c. Explain “demand-side economics.”
d. How would rightward shift in the aggregate demand curve with a horizontal aggregate supply curve affect
employment and price level?
e. How would leftward shift in the aggregate demand curve with a horizontal aggregate supply curve affect
employment and price level?
39. Draw a model that blends the classical and Keynesian models, and includes an intermediate range.
a. If AD decreases, which “range” are we in?
b. If we are in this range, what can the government do in response? Why is this response logical?
c. If AD increases, which “range” are we in?
d. If we are in this range, what can the government do in response? Why is this response logical?
Video Lesson:
 Deflation: https://www.khanacademy.org/economics-finance-domain/macroeconomics/inflation-topic/macroecondeflation-tutorial/v/deflation
40. What is deflation?
41. What is the “ratchet effect”?
42. What are some of the reasons why deflation is very rare?
Concept Group 5: The Phillips Curve
Video Lessons:
 The Phillips Curve: https://www.khanacademy.org/economics-finance-domain/macroeconomics/inflationtopic/phillips-curve-tutorial/v/phillips-curve
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Draw a short-run Phillips Curve.
Explain the relationship between unemployment and inflation in the Phillips Curve.
Define stagflation.
Draw a side-by-side AS/AD and short-run Phillips Curve. Show the impact on both of Show the impact on both of a
decrease in AS caused by a negative supply shock.
47. Draw a side-by-side AS/AD and short-run Phillips Curve.
a. Draw a side-by-side AS/AD and short-run Phillips curve. Show the impact on both of an increase in AD caused
by increased consumer spending.
b. What will happen in the long-run?
c. Draw the long-run Phillips Curve?
48. Explain what the long-run Phillips Curve shows.
49. Draw each of the following graphs: (1) PPC, (2) Business cycle, (3) AD/AS, (4) Phillips Curve. Show the following
scenarios on each graph, labeling them A, B, and C
a. Full employment
b. Inflationary gap
c. Recessionary gap
Concept Group 6: Fiscal Policy
Video Lessons:
 Monetary and Fiscal Policy: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/monetary-fiscal-policy/v/monetary-and-fiscal-policy
 Tax Lever of Fiscal Policy: https://www.khanacademy.org/economics-finance-domain/macroeconomics/aggregatesupply-demand-topic/monetary-fiscal-policy/v/tax-lever-of-fiscal-policy
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Define fiscal and monetary.
Which two tools does the government have to stabilize the economy?
Who directs monetary policy? What are the three “levers” that can be used to influence the economy?
Who directs fiscal policy? What are the two “levers” that can be used to influence the economy?
Define discretionary.
Explain the difference between discretionary and non-discretionary fiscal policies.
Define contractionary. List some contractionary fiscal policies.
Define expansionary. List some expansionary fiscal policies.
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58. Complete the chart below:
Scenario
Impact on Price Level
Impact on Real GDP
Component of GDP
(Y) Affected
Raise personal income taxes
Lower personal income
taxes
Increase government
spending
Decrease government
spending
Raise business taxes
Lower business taxes
Concept Group 7: The Multiplier Effect
Video Lessons:
 Consumption Function: https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-andexpenditure-topic/consumption-function/v/consumption-function-basics
 MPC and the Multiplier: https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-andexpenditure-topic/MPC-tutorial/v/mpc-and-multiplier
 Math-based Explanation of the Multiplier (optional): https://www.khanacademy.org/economics-financedomain/macroeconomics/income-and-expenditure-topic/MPC-tutorial/v/mathy-version-of-mpc-and-multiplier-optional
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Define disposable income.
Define the multiplier effect.
Define marginal propensity to consumer. What is the formula for MPC?
Define marginal propensity to save. What is the formula for MPS?
Write two equations that show the relationship between MPC and MPS and the number 1.
What is the formula for total change in GDP?
What is the spending multiplier? Give two ways to calculate the spending multiplier.
How can you increase the spending multiplier?
Calculate:
a. If Jan’s disposable income rose from $500 to $600 and her level of personal-consumption expenditures rose
from $400 to $480, calculate her MPC and MPS.
b. If Ric’s disposable income rose from $600 to $800 and his level of personal-consumption expenditures rose
from $500 to $530, calculate his MPC and MPS.
c. If the MPC is .9, calculate the spending multiplier.
d. If the MPC is .8, calculate the spending multiplier.
e. If MPC is .7, and consumption increased $2M. How much will GDP increase?
f. If MPC is .5, and consumption increased $2M. How much will GDP increase?
g. If MPC is .3 and investment increases $2M. How much will GDP increase?
h. If MPC is 0 and investment increases $2M. How much will GDP increase?
68. What is the balanced-budget multiplier? What does this number show?
69. What is the tax multiplier? What does this number show?
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70. Answer the questions below based on the graph:
a.
b.
c.
d.
What type of gap is this economy experiencing? How do you know?
Does the government need to engage in contractionary or expansionary policies?
What are two options available to the government to address the gap?
If the MPC is .7, how much is needed to close the gap?
71. Answer the questions below based on the graph:
a. What type of gap is this economy experiencing? How do you know?
b. Does the government need to engage in contractionary or expansionary policies?
c. What are two options available to the government to address the gap?
d. If the MPC is .7, how much initial government spending is needed to close the gap?
72. How does changing taxes work differently from adjusting government spending? Why?
73. Assume that the MPC is .6.
a. Calculate the multiplier.
b. If the government cuts taxes by $4 million, how much will consumer spending increase?
74. Assume that the MPC is .8.
a. Calculate the multiplier.
b. If the government cuts taxes by $4 million, how much will consumer spending increase?
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75. Answer the questions below based on the graph:
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a. What type of gap is this economy experiencing? How do you know?
b. Does the government need to engage in contractionary or expansionary policies?
c. What are two options available to the government to address the gap?
d. If the MPC is .9, how much should they increase government spending?
e. Assuming the same MPC, how much should taxes be cut?
What are some examples of non-discretionary fiscal policies?
In order to be considered an automatic, “built-in”, or non-discretionary stabilizers, what must happen to taxes
automatically during a recessionary period? What about during an inflationary period?
Explain progressive tax policy.
Explain how the progressive tax policies act to stabilize the economy.
Concept Group 8: Problems with Fiscal Policy
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What is a budget deficit?
What is the national debt?
How much is the current US national debt?
What’s the challenge with combining government spending with tax cuts?
Explain each of the following problems with fiscal policy:
a. Problems of timing
b. Politically-motivated policies
c. Crowding-out effect
d. Net-export effect
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FRQ Practice
1.
2015 (do not do b and c)
2.
2014 (do not do d or e)
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3.
2012
4.
2011 (do not do d)
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5.
2011B (do not do e)
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