Wednesday, November 30, 2016

AD/AS Equilibrium FRQ Review

AD/AS Equilibrium Review

Ok, so I'm working on a review booklet for the AP Macro Course.

Equilibrium: Understanding and Practice

Over the last 22 AP Macro Exams the Equilibrium Graph of the economy has been requested 8 times. It is expected that you not only be able to graph an economy in equilibrium but you must be able to recognise an economy in equilibrium by the AP language (phraseology)

2004B - Assume the economy is in Equilibrium.
2005B - Assume the country's economy is in Equilibrium
2005 - Assume the economy is in equilibrium at the full-employment level of real gross domestic product.
2007 - Assume the economy is in equilibrium.
2008 - Assume the economy is at full employment and has a balanced budget.
2009 - Assume the economy is in long-run equilibrium.
2010 - Assume the government is currently in long-run equilibrium.
2011B - Assume the economy is in long-run equilibrium with a balanced government budget.
2013 - Assume the economy is operating at full employment.

The words that tip you off for equilibrium are: Equilibrium (Obviously), Full-employment, and Long-Run Equilibrium - These all mean an Equilibrium graph

Be able to draw a country's economy in equilibrium using a LRAS, SRAS, and AD curve. Know that the axis are labelled PL (price level) and RGDP (real gross domestic product). Understand that the Y stands for Income.

I always start every problem from Equilibrium. From the AD/AS cheat Sheet Here

There are literally only 5 (five) main graphs that you need to be able to draw to answer the AD/AS sections of the course.

These are: Equilibrium, Recession, Inflation, Stagflation and Growth.

If you can draw the above with their long-run companions then you are well on your way to be able to master this section of the course. At least for the FRQ portion of the exam. 

I also find it helpful to answer all questions using the acronym (ROUPY)

Show when you answer a section of the question what is happening.

O - Output
U - Unemployment
P - Price Level (PL)
Y - Income 

Understand that RGDP/Output/Incomes all travel in the same directions

You might be tempted to say that the PL will increase also when the three above increase but during deep recessions the Keynesians would argue the point. They believe that during deep recessions the AS curve is flat/horizontal in the beginning range and therefore if AD increases price levels don't necessarily rise..... Be aware of this, it isn't quizzed very often but it should be in the back of your mind.

So, how would this look on an AP exam.

1. Assume the economy is in equilibrium with full employment.
(a) Draw a CLG (clearly labelled graph) of the AD/AS curve of the economy at full employment.


RGDP - Stable (stable means not decreasing or increasing)
Output - Stable
Unemployment - NRU (at the natural rate of unemployment) (Understand this!!!!)
Price Level - Stable at PL1
Y = Income - Stable at Y1

You must draw this graph at least 100 times,, as all questions should (in my opinion) start from this point.

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