AP Macroeconomics Unit 3: National Income and Price Determination Notes

Introduction

The AD–AS model explains how spending and production conditions determine real output and the price level, while multipliers, fiscal policy, and wage adjustment explain how equilibrium can move.

Aggregate demand combines planned consumption, investment, government purchases, and net exports. Short-run aggregate supply reflects production decisions while some nominal costs adjust slowly; long-run aggregate supply marks potential output after wages and prices can adjust.

A complete analysis names the initiating event, states what stays constant, shifts only the affected curve, and separates the immediate result from later adjustment. The graph predicts directions under its assumptions; it does not by itself decide which policy is desirable.

Planned spending

aggregate demand

Input costs and productivity

short-run aggregate supply

Resources and technology

potential output

AD–SRAS intersection

short-run equilibrium

Wage and expectation adjustment

return toward LRAS

Current exam guidance: Aligned to the current 2026–27 AP Macroeconomics framework. Models identify their axes, assumptions, time horizon, movement or shift, and quantitative consequence.

3.1

Aggregate Demand (AD)

Why does aggregate demand slope downward, and what makes the entire curve shift?

Short answer

A lower price level supports planned real spending through real-balance, interest-rate, and net-export channels; autonomous changes in $C$ , $I$ , $G$ , or $NX$ shift the entire curve.

Know firstGDP expenditure identity · Price level · Interest rates and exchange rates

Aggregate demand is planned spending at each price level

Aggregate demand records the quantity of domestically produced final goods and services that households, firms, government, and foreign buyers plan to purchase at each overall price level. The identity $Y=C+I+G+NX$ organizes those sources of spending. It does not say that output automatically equals spending at every point on the curve; equilibrium is introduced when AD meets aggregate supply.

A lower price level raises the purchasing power of a given stock of money and wealth. In the standard model it also reduces pressure on interest rates, supporting interest-sensitive consumption and investment, and can make domestic output relatively less expensive, supporting net exports. Those are reasons for movement along AD. Confidence, expected profitability, fiscal settings, monetary conditions, or foreign income change planned spending at every price level and therefore shift AD.

Economic model

Separate movement along AD from an AD shift

Compare a price-level change on one schedule with an autonomous-investment change that creates a new schedule.

Held constant: The schedules are synthetic comparative-static fixtures; variables not named in the visual are held constant.
Time horizon: Use the horizon named in the lesson. The visual compares model states rather than tracing calendar time.
Read the change: higher autonomous investment

AD₀AD₁

Horizontal axis: Real GDP
Vertical axis: Price level

1A2B3C

A→B: price-level movement
B→C: investment shifts AD

Y=C+I+G+NX

Two downward schedules show real GDP 460, 500, and 540 on AD zero at price levels 110, 100, and 90. AD one is 25 output-index points farther right at every price level.

Read the model as a table

Separate movement along AD from an AD shift values
Price level	AD₀ real GDP	AD₁ real GDP
110	460	485
100	500	525
90	540	565

Shoppers selecting groceries inside a large supermarket. — Consumption is one part of aggregate demand
Household purchases of final goods contribute to consumption spending. Aggregate demand also includes investment, government purchases, and net exports, so retail activity is only one part of the total.
Use this visual to see
Anchor the consumption component of aggregate demand in an observable purchasing setting.
What it cannot show
A busy store does not identify total consumption, the price level, planned expenditure at other price levels, or whether aggregate demand shifted.

Match the trigger to the graph action

Trigger	Graph action
price level changes	move along AD
autonomous consumption, investment, purchases, or net exports changes	shift AD
real GDP changes after another curve shifts	read the new equilibrium

Decide movement or shift

Check whether the price level itself changed.
If yes, remain on the existing AD curve.
If not, identify the spending component that changed.
Trace the component change to total planned expenditure.
Shift AD right for an increase and left for a decrease, holding other determinants constant.

Keep these three ideas

Price level changes move along AD.
Autonomous changes in $C$ , $I$ , $G$ , or $NX$ shift AD.
AD is economy-wide planned spending, not demand for one product.

National Income and Price Determination