AP EXAM REVIEWUNIT 3 NATIONAL INCOME AND PRICE

DETERMINATION

Marginal Propensity to consumeA. Marginal = extraB. proportion of any change in income that is consumedC. MPC = change in consumption

change in income

Marginal Propensity to SaveA. proportion of any change in income that is savedB. MPS = change in saving

change in income

C. MPC + MPS = 1

MultiplierA. A small change in

1. Investment spending 2. Consumption3. Net exports4. Government purchases

leads to an even bigger change in GDPB. Multiplier determines how large the change will be

C. Multiplier =

D. Multiplier =

___1___1 - MPC

_1__MPS

http://www.youtube.com/watch?v=JQVfkH-2G-I

Remember this formula?

Instead of X – M we used Xn

The same formula works for ADAD = C + I + G + XnWhen part of the formula changes the curve will shift

Movement along the AD curve1. caused by a change in price level 2. movements along a fixed aggregate demand curve represent changes in real GDP

Aggregate Demand

Shift in the curve or demand shock1. Rightward shift shows increase in AD2. Leftward shift shows decrease in AD

Real GDP

Shifts caused by a change in the determinants of ADa. Consumer spending - Cb. Investment spending - Igc. Government spending - Gd. Net export spending - Xn

A. Shows the level of real domestic output firms will produce at each price level

B. AS curve is upward sloping showing a positive relationship between price and output

C. Movement along the curve caused by a change in price

SRAS

Aggregate Supply

Shift in the curve or Supply Shocka. Leftward shift – decrease in SRASb. Rightward Shift – increase in SRASc. Changes in factors other than price shift curve

1. Change in price of resources (input)2. Change in wages (input)3. Changes in productivity

https://www.youtube.com/watch?v=UwAQRnpVMzI&index=3&list=PLBC35DEA1D1A98034

Long Run Equilibrium1. Where short run equilibrium and LRAS curve intersect2. The economy self corrects

Draw an AD/AS model showing the change indicated.