1. Overview of Short-Run AD-AS Changes★★☆☆☆⏱ 2 min

This topic analyzes how exogenous (external, non-price driven) changes to aggregate demand or short-run aggregate supply shift the relevant curve, creating a new short-run equilibrium with a different output level and price level. In the short run, nominal wages and other input prices are sticky, so the SRAS curve remains fixed after a shock, unlike long-run analysis which relies on input price adjustment.

This topic makes up ~10-12% of Unit 3 content, and ~2-3% of your overall AP exam score, appearing in both multiple-choice (MCQ) and free-response (FRQ) sections. It is the foundation for all business cycle and policy analysis in AP Macroeconomics.

2. Demand Shocks and AD Shifts★★☆☆☆⏱ 4 min

Positive demand shocks shift AD rightward, and include increases in consumer confidence, higher government spending, tax cuts, lower interest rates, or increased export demand. Negative demand shocks shift AD leftward, caused by decreases in any AD component. When AD shifts, the new short-run equilibrium is the intersection of the shifted AD and the unchanged original SRAS.

A rightward AD shift increases both equilibrium real output ($Y$) and the aggregate price level ($PL$). If new output is above potential output ($Y_p$), the economy has an inflationary gap. A leftward AD shift decreases both output and price level, creating a recessionary gap if output is below $Y_p$. By Okun's law, higher output reduces cyclical unemployment, and lower output increases it.

Exam tip:

On AP FRQs, always explicitly label original curves ($A{D}_1$, $SRA{S}_1$), shifted curves ($A{D}_2$), original and new equilibrium points, and mark potential output $Y_p$ to earn all possible graphing points.

3. Supply Shocks and SRAS Shifts★★★☆☆⏱ 4 min

Common causes of SRAS shifts include changes in energy/commodity prices, nominal wage changes, import prices for intermediate goods, productivity changes, and regulatory changes. A negative (adverse) supply shock increases production costs, shifting SRAS leftward: the new equilibrium has lower output and higher prices, a harmful combination called stagflation. A positive (beneficial) supply shock reduces production costs, shifting SRAS rightward, leading to higher output, lower prices, and lower unemployment.

Exam tip:

AP MCQs almost always test the stagflation distinction. Remember: only a leftward shift of SRAS causes stagflation. A leftward shift of AD causes lower output and lower inflation, never stagflation.

4. Multiplier Effect of AD Shifts★★★★☆⏱ 6 min

The multiplier effect describes how an initial change in aggregate demand leads to a larger total change in short-run equilibrium output. This occurs because initial spending becomes income for other households, who spend a portion of that income, creating additional rounds of spending that add to the total change. The multiplier size depends on the marginal propensity to consume (MPC), the share of additional income that households spend rather than save.

The spending multiplier, used for initial changes in government spending, investment, or exports, where $MPS$ is the marginal propensity to save, is:

For changes in lump-sum taxes, the tax multiplier is smaller, because only the MPC portion of a tax change is spent in the first round:

The total change in short-run equilibrium output is $\Delta Y=k\times \Delta G$ for spending changes, and $\Delta Y=k_t\times \Delta T$ for tax changes, where $\Delta T$ is negative for a tax cut.

Exam tip:

Never mix up the spending and tax multipliers. The tax multiplier has a smaller absolute value than the spending multiplier, because a portion of any tax cut is saved rather than spent. AP MCQs almost always list the spending multiplier result as a trap answer for tax change questions.