Teaching Unit III: Models of Economic Performance. Unit III entails the content area of
National Income and Price Determination as detailed in the AP* Economics Course Description1
(Content Area III, A-C) TEACHER NOTE: Short run stabilization policies, or fiscal policy, is
reserved for Teaching Unit V on combined fiscal and monetary policies.
I. Plan:
Teaching Materials
Instructors Manual Text readings
An Introduction to Basic Macroeconomic
Markets, Chapter 9
Chapter 9, An Introduction to Basic
Macroeconomic Markets
Key instructional objectives: Students do the following
Objectives related to the aggregate demand and aggregate supply model witin the circular
flow
2. define aggregate demand (AD), or purchases and explain the slope of the aggregate demand
curve
4. define the long run aggregate supply (LRAS) curve and explain why the LRAS is vertical.
6. distinguish between short run equilibrium (actual output) and long run (potential output)
Objectives related to the resource (labor) market within the circular flow
7. identify the components of the resource (labor) market
8. explain the effects of an increase or decrease in demand for resources
9. explain the effects of a change in resource cost on the goods and services market
Objectives related to the financial markets within the circular flow
10. identify the components of the loanable funds market
a. define and explain the supply and demand for loanable funds
b. explain how interest rates are determined
Objectives related to the international market within the circular flow
11. identify the components of the foreign exchange market
a. explain the demand for and supply of money on the foreign exchange market
b. explain how imports and capital outflows create a demand for money
Objectives related to dynamic changes and economic fluctuations
2. identify the factors that cause a shift in the SRAS curve
4. explain how productivity and price levels change in response to a change in aggregate
demand/aggregate supply.
5. distinguish between anticipated and unanticipated changes in the AS/AD model
6. explain the impact of unanticipated changes in AD, SRAS, has upon price levels, employment
and economic growth
8. Draw and define inflationary and recessionary gaps
9. explain and graph the self correcting model
10. using the AS/AD model or the aggregate expenditure model
a. explain a consumption function
11. using the AS/AD model, explain and graph the short run impact on the product markets of a
variety of changes in
a. the resource market
b. loanable funds market
c. foreign exchange market
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Computational and graphing skills: Students must complete these tasks
Draw the circular flow models
Explain the components of a circular flow model; explain how the components are related
to national income and GDP concepts
Draw and explain an AS/AD model at various levels of unemployment.
Formative Signals: The following content and skill areas have been identified as areas of
weakness for students based upon past objective and free response examinations.
Objective Formative Signals: Based upon
the released objective AP* Micro Economics
examinations, less than 50% of the students
have been able to correctly answer questions to
following
Free response Formative Signals: Past
students have found these to be problematic
areas
understand the multiplier effect
analyze effects of expansionary fiscal
policy (increasing AD) within a
segmented SRAS curve, specifically
within a horizontal SRAS range.
understand the multiplier effect and
how it works
differentiate between changes in SR
and LR investment and changes in the
AS/AD model
450 Part 4/Unit III
Objective Formative Signals: Based upon
the released objective AP* Micro Economics
examinations, less than 50% of the students
have been able to correctly answer questions to
following
Free response Formative Signals: Past
students have found these to be problematic
areas
deduces causes for a decrease in
II. Teach
Recommended sequence of instruction: Teach market concepts in this sequence
Chapter 9
An Introduction to Basic Macroeconomic Markets
1. UNDERSTANDING MACROECONOMICS: OUR GAME PLAN, P. 173
2. FOUR KEY MARKETS: RESOURCES, GOODS AND SERVICES, LOANABLE FUNDS,
AND FOREIGN EXCHANGE, P. 173
Explain the circular flow model and use the model to explain how households, firms, government
and international markets interact to comprise GDP
3. AGGREGATE DEMAND FOR GOODS AND SERVICES, P. 176
Explain the factors that cause a downward sloping aggregate demand (AD) curve
4. AGGREGATE SUPPLY OF GOODS AND SERVICES, P. 178
Explain the factors that cause an upward sloping short run aggregate supply (SRAS) curve
Explain the concept of a long run aggregate supply curve (LRAS)
5. EQUILIBRIUM IN THE GOODS AND SERVICES MARKET, P. 180
given the assumption of price flexibility
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Explain the process by which equilibrium occurs in the product market
6. RESOURCE MARKET, P. 184
Explain the reasons for the downward sloping demand curve for a resource
Inverse relationship between wage rates (or factor resource cost) and quantity demanded
Factors that shift the demand for a resource that include changes within the product market
7. LOANABLE FUNDS MARKET, P. 185
Explain and illustrate the inverse relationship between the real interest rate and the demand for
loanable funds.
8. FOREIGN EXCHANGE MARKET, P. 190
Explain and illustrate the inverse relationship between the domestic price of foreign currency and
the quantity demanded of domestic imports.
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Explain and illustrate the direct relationship between the domestic price of foreign currency and
the quantity supplied of domestic exports.
Explain how equilibrium in the foreign currency exchange market is equivalent to (imports plus
capital inflows) = (exports plus capital outflows)
Chapter 10
Dynamic Change, Economic Fluctuations, and the AS/AD Model
1. ANTICIPATED AND UNANTICIPATED CHANGES, P. 196
2. FACTORS THAT SHIFT AGGREGATE DEMAND, P. 196
3. SHIFTS IN AGGREGATE SUPPLY, P. 199
4. STEADY ECONOMIC GROWTH AND ANTICIPATED CHANGES IN LONG-RUN
AGGREGATE SUPPLY, P. 202
Explain the factors that influence (shift) the SRAS curve
Explain factors that influence the increase (shift) in the LRAS curve.
5. UNANTICIPATED CHANGES AND MARKET ADJUSTMENTS, P. 203
Explain anticipated versus unanticipated changes in the markets.
Anticipated = no short run changes in output and employment
6. UNANTICIPATED CHANGES, RECESSIONS, AND BOOMS, P. 209
Explain the concept and process of self correction
Changes in resource price levels cause self correction
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Historical record of the self correcting model
Chapter 11
Fiscal Policy: The Keynesian Views and Historical Perspective
TEA NOTE: In this teaching sequence, the emphasis is only on a competing model to
explain fluctuations in gross domestic product, employment, and price levels. Specific fiscal
policy instruction is reserved for teaching Unit V, Stabilization).
1. THE GREAT DEPRESSION AND THE MACROADJUSTMENT PROCESS, P. 216
2. THE GREAT DEPRESSION AND KEYNESIAN ECONOMICS, P. 216
3. THE MULTIPLIER AND ECONOMIC INSTABILITY, P. 218
4. KEYNES AND ECONOMIC INSTABILITY: A SUMMARY, P. 220
5. THE KEYNESIAN AGGREGATE EXPENDITURE MODEL, ONLINE APPENDIX
s understanding of the Keynesian equilibrium model and
graphical analysis is not measured by the AP* Macro Economics examination. However, this
section presents useful information concerning core concepts related to the multiplier and
subsequent fiscal policy actions. Emphasis may be given to the following
Identify and explain relationship between income and consumption (consumption
function)
Key conceptual questions: Students demonstrate their understanding of the material by
answering the following key conceptual questions
1. Why does national income equal national product?
2. How does a circular flow describe the economy of the United States?
3. Using a circular flow model, show how the U.S. economy is linked with the rest of the world.
4. What do the following curves (concepts) describe?
a. Short run aggregate supply
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5. Show how the AS/AD model can describe the following
a. Short run equilibrium where actual output is greater than potential output
6. What is the relationship between labor hours, labor productivity, and real GDP?
7. What is a productivity curve? How does the productivity curve determine potential output?
8. How can an increase in human investment increase potential GDP? What is the impact of the
9. What determines the equilibrium financial market interest rate?
10. What factors cause a change in the demand for investment funds? What factors cause a
change in the quantity demanded of investment funds?
11. What factors cause a change in the supply of loanable funds? What factors cause a change in
the quantity supplied of investment funds?
Key conceptual questions: (Reinforcement within the Keynesian Model) Students
demonstrate their understanding of the material by answering the following key conceptual
questions
1. What are the determinants of aggregate demand? List and explain.
2. What are the determinants of short run aggregate supply? List and explain
3. What are the determinants of long run aggregate supply? List and explain
4. What is the multiplier effect? What information do you need in order to determine the
multiplier effect?
5. How does the economy adjust to changes in SRAS and LRAS?
6. What causes recessions and booms?
7. Does the market economy have a self-correcting mechanism that will lead it to full
employment? Explain how the self-correcting mechanism works. What part of the
mechanism may fail?
III. Assess: Suggestions for determining what and how much students have learned.
Past Objective AP* Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related to this unit of instruction.
Task and behaviors related to aggregate demand
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recognize and know causes of an increase in aggregate demand
recognize variables or policies which would increase/decrease AD
understand changes in savings functions with a change in income
determine value of spending multiplier
predict results in equilibrium level of income and consumption, given changes in the
marginal propensity to consume (MPC)
interpret aggregate expenditure graph showing consumption and real income
calculate marginal propensity to save (MPS), given change in investment and change in
total income
Task and behaviors related to aggregate supply
understand causes for shifting of the SRAS curve
recognize causes and/or results of a supply shock
understand factors causing LRAS to shift to the right (increase)
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Task and behaviors related to equilibrium
recognize conditions that explain a decline in GDP
differentiate impact, given assumptions of sticky vs. flexible prices
recognize various implications of a full employment economy (long run equilibrium) in
terms of unemployment and price stability
understand the changes in national income, given changes in government spending
(multiplier affect)
recognize self-correcting assumption
understand causes and results of increases in inventories
recognize equilibrium in an aggregate expenditure model and reasons for operating below
equilibrium
predict results of increases in business inventories
recognize various equilibrium points, given an aggregate expenditure model; recognize
relationship between investment and savings at equilibrium
interpret aggregate expenditure graph showing recession
deduce causes for a decrease in unemployment and inflation rates using AS/AD model
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(NOTE: Core concepts related to the aggregate expenditure (Keynesian) model such as average
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to this unit of instruction.
1989-1997, identify the state of the economy given unemployment rates, inflation rates,
and growth rates; interpret novel data related to price levels, unemployment, and national
output information, using an AS/AD model.
1998, graph AS/AD economy at FE
1999, evaluate how changes in investment will affect Ad, capital stock, LRAS, and output
1999, explain how changes in interest rate change aggregate output and price levels
2000, use AS/AD to illustrate recession and price levels and GDP; show how an increase
in net investment changes AD and LRAS
2001, show and explain effects of an increase in AD, given the economic scenario of
operating below the FE level of output; show how decrease in corporate profit taxes affect
AD, LRAS, and output and price levels.
2003B, draw and explain SRAS/AD graph of an economy operating below FE; show and
explain impact of an increase in government spending and the impact of deficits on AD,
output and prices; interest rate; international value of the dollar
2004, draw and explain recession or less than FE, using AS/AD graph; graph and explain
the self-correcting model, given no policy change.