AP Economics:
AD/AS Review FRQs
May 7, 2015
AD/AS Review FRQs
1) Explain how each of the following will affect long-run aggregate supply (potential
real gross domestic product):
a) a decrease in the labor force participation rate Decrease in LPF reduces
supply of labor and increases wages, reducing employment, reducing LRAS
b) an increase in the government deficit following a reduction in personal
income taxes Increase in deficit increase demand for loanable funds,
increasing real interest rates, decreasing I, which reduces capital stock and
decreases LRAS
c) a decrease in the quantity of inputs required to produce a unit of output
Increase in productivity increases LRAS
d) an increase in the quantity and quality of education Increase in human capital
increases productivity of labor force, increasing LRAS
e) an increase in the rate of savings Increase in savings causes in increase in
investment, increasing capital stock and increasing LRAS
2) Suppose that the United States economy is in a deep recession.
a) Using a correctly labeled aggregate demand and aggregate supply graph,
show the equilibrium price level and real gross domestic product.
Correct labels; downward sloping AD and upward sloping SRAS and vertical
LRAS to the right of short-run equilibrium
b) There is a debate in Congress as to whether to decrease personal income
taxes by a given amount or increase government purchases by this amount.
Which of these two fiscal policies will have a larger impact on real gross
domestic product? Explain. Increase in G. The multiplier of G is higher than
the tax multiplier if MPS is >0. This is because some portion of tax decrease
is saved, not spent.
c) Explain how a decrease in personal income taxes will affect each of the
following in the short run:
i) Consumption Increases due to increase in disposable income
ii) real gross domestic product and the price level Both increase due to
increase in consumption causing increase in AD
iii) imports Increase due to increase in disposable income
iv) exports Decrease. Increase in AD causes higher price levels, making
exports more expensive to other nations or Increase in disposable
income causes increase in AD, causing increase in demand for money
(MD), causing increase in interest rates, causing increase in value of
currency, making exports more expensive to other nations.
d) Explain the mechanism by which an increase in net investment will cause each
of the following to change:
i) aggregate demand I is a component of AD
ii) long-run aggregate supply I causes an increase in capital stock, which
increases productivity, increasing LRAS
3) How does each of the following changes affect the real gross domestic product and price
level of an open economy in the short run? Explain each.
a) An increase in the price of crude oil, an important natural resource SRAS
shifts to the left, increasing price level and decreasing Real GDP
b) A technological change that increases the productivity of labor SRAS shifts
to the right, decreasing price level and increasing Real GDP
c) An increase in spending by consumers AD shifts to the right, increasing
both price level and Real GDP
d) The depreciation of the country’s currency in the foreign exchange market
Exports become cheaper to other nations so Net Exports increase, causing
AD to shift to the right, increasing both price level and Real GDP