AP Macroeconomics

## Learning Outcomes

- Explain why the long-run aggregate supply curve is vertical
- Identify why LRAS is drawn at **full-employment output** or **Y_f**
- Distinguish between **LRAS** and **SRAS**
- Explain why full employment does not mean zero unemployment
- Interpret recessionary gaps and inflationary gaps using an AD-AS graph
- Identify the main factors that shift LRAS
- Apply LRAS reasoning to AP Macroeconomics graph and FRQ questions

## AP Macroeconomics Syllabus

For the AP Macroeconomics, you are expected to understand long-run aggregate supply at full-employment output, with a focus on the following syllabus points:

- Know that **LRAS** is drawn as a vertical line at **Y_f**, the economy’s full-employment real GDP
- Identify **potential GDP**, **full-employment output**, and **natural level of output** as closely related AP terms
- Explain why changes in the **price level** do not change real GDP in the long run
- Understand that full employment means the economy is at the **natural rate of unemployment**, not zero unemployment
- Distinguish clearly between **SRAS**, which is upward sloping, and **LRAS**, which is vertical
- Interpret output to the left of **Y_f** as a **recessionary gap** and output to the right of **Y_f** as an **inflationary gap**
- Identify the factors that shift LRAS, including changes in labor, capital, natural resources, technology, human capital, productivity, and institutions
- Understand that after an AD shock, **SRAS shifts in the long run until output returns to Y_f**

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. Why is the long-run aggregate supply curve vertical rather than upward sloping?
2. What does **Y_f** represent on an AD-AS graph?
3. Why does full employment not mean 0% unemployment?
4. What is the difference between a recessionary gap and an inflationary gap?
5. Name three factors that can shift LRAS.

## Introduction

Long-run aggregate supply is one of the most tested parts of the AD-AS model because it links output, unemployment, inflation, and economic growth in one graph. On the AP exam, students are often asked to explain why the economy can temporarily move away from full-employment output in the short run but returns to it in the long run.

The central idea is simple but easy to misuse: in the long run, real GDP is determined by the economy’s productive capacity, not by the price level. That is why LRAS is drawn as a vertical line at **Y_f**. If you understand that one point, many graph questions become much easier.

> **Key Term: long-run aggregate supply (LRAS)**
> The level of real GDP the economy can produce in the long run when resources are fully employed; it is drawn as a vertical line.

## Introduction to the vertical LRAS curve

### Why LRAS is vertical

On an AD-AS graph, the vertical axis is the **price level** and the horizontal axis is **real GDP** or output. The LRAS curve is vertical because, in the long run, changes in the overall price level do not permanently change the quantity of real output the economy can produce.

Why not? Because when all prices rise, input prices also adjust. Firms may at first receive higher prices for their output, but over time wages and other production costs rise as well. Once those costs fully adjust, firms no longer have a reason to keep producing more just because the price level is higher.

This is the key contrast with the short run. In the short run, some wages and input prices are sticky, so higher output prices can temporarily encourage more production. In the long run, that temporary advantage disappears.

> **Key Term: price level**
> The average level of prices in the economy, shown on the vertical axis of the AD-AS model.

A useful way to phrase this in AP style is:

- In the short run, a higher price level can change real output
- In the long run, a higher price level changes nominal values more than real output
- Therefore, long-run real GDP is fixed at potential output unless productive capacity changes

Students often memorize “LRAS is vertical because prices do not matter.” That is too vague. Prices do matter for inflation and nominal wages. What does **not** happen is a permanent change in real GDP from a price-level change alone.

> **Test Tip:** If an FRQ asks why LRAS is vertical, do not just write “because output is fixed.” Explain that in the long run wages and input prices fully adjust, so real GDP depends on resources and productivity rather than the price level.

### Why LRAS is located at Y_f

The vertical LRAS curve is drawn at **Y_f**, which stands for **full-employment output**. This is the sustainable amount of real GDP the economy can produce when labor and other resources are being used normally and efficiently.

> **Key Term: full-employment output (Y_f)**
> The level of real GDP produced when the economy is at the natural rate of unemployment and using resources at normal capacity.

You may also see:

- **potential GDP**
- **full-employment real GDP**
- **natural level of output**
- **potential output**

For AP Macroeconomics, these are treated as near-equivalent labels in graphing and explanation.

The word “sustainable” matters. The economy can produce above Y_f for a while in the short run, but not permanently. It can also produce below Y_f during a recession. Y_f marks the economy’s normal productive limit given current labor, capital, natural resources, technology, and institutions.

A good comparison is the production possibilities frontier. Being at Y_f is like operating at productive capacity. Producing less means resources are underused. Producing more means the economy is overstretched.

## Full employment, natural unemployment, and gap analysis

### Full employment does not mean zero unemployment

One of the most common AP mistakes is saying that full employment means everyone has a job. That is false.

At full employment, the economy is at the **natural rate of unemployment**. This means there is no cyclical unemployment, but there is still frictional and structural unemployment.

> **Key Term: natural rate of unemployment**
> The unemployment rate that exists when the economy is at full employment, including frictional and structural unemployment but not cyclical unemployment.

Why does this matter? Because some unemployment is normal even in a healthy economy:

- **Frictional unemployment** exists because people move between jobs
- **Structural unemployment** exists because worker skills or locations do not always match available jobs
- **Cyclical unemployment** exists only when the economy is below full employment because of weak demand

So when actual unemployment equals the natural rate, the economy is at Y_f. That does not mean 0% unemployment. It means unemployment is at its normal long-run level.

Students sometimes think any unemployment means the economy must be left of LRAS. That is wrong. The LRAS position already assumes normal unemployment exists.

> **Test Tip:** Safe AP wording is: “At full-employment output, cyclical unemployment is zero, but frictional and structural unemployment remain.”

### Reading positions relative to LRAS

Once LRAS is drawn, you can judge whether the economy is below, at, or above potential output.

If equilibrium real GDP is **left of LRAS**, actual output is below Y_f. This is a **recessionary gap**.

If equilibrium real GDP is **at LRAS**, the economy is at full-employment equilibrium.

If equilibrium real GDP is **right of LRAS**, actual output is above Y_f. This is an **inflationary gap**.

> **Key Term: recessionary gap**
> The amount by which actual real GDP falls below full-employment output, Y_f.
>
> **Key Term: inflationary gap**
> The amount by which actual real GDP exceeds full-employment output, Y_f.

These gaps are very important because they explain both unemployment and later adjustment.

If the economy is in a recessionary gap:

- firms are producing less than capacity
- cyclical unemployment is high
- unused labor and other resources put downward pressure on wages and input prices
- over time, SRAS shifts right
- output returns to Y_f

If the economy is in an inflationary gap:

- firms are producing beyond sustainable capacity
- labor markets are tight
- wages and input prices rise
- over time, SRAS shifts left
- output returns to Y_f

Notice the pattern: in standard AP long-run adjustment stories, **LRAS does not move**. **SRAS moves until output returns to Y_f**.

This is why LRAS is a benchmark. It tells you where the economy tends to return in the long run.

## LRAS compared with SRAS and long-run adjustment

### SRAS versus LRAS

Students often confuse these two curves because both are called aggregate supply. The easiest way to separate them is to ask what causes output to change.

| Feature                                | SRAS                                                    | LRAS                                                |
| -------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- |
| Shape                                  | Upward sloping                                          | Vertical                                            |
| Why?                                   | Some wages and input prices are sticky in the short run | Wages and input prices fully adjust in the long run |
| Can price level changes affect output? | Yes, temporarily                                        | No, not permanently                                 |
| Main use                               | Short-run fluctuations                                  | Productive capacity benchmark                       |

SRAS slopes upward because firms may respond to higher output prices before their costs have fully risen. LRAS is vertical because that temporary imbalance disappears once input costs adjust.

This distinction is often tested indirectly. A question may ask what happens after aggregate demand rises. In the short run, real GDP rises and the economy may move right of Y_f. In the long run, SRAS shifts left, and real GDP returns to Y_f while the price level ends higher.

That last point is crucial: **aggregate demand can change the long-run price level, but not long-run real GDP**.

### A worked adjustment example

Suppose the economy begins in long-run equilibrium:

- AD, SRAS, and LRAS all intersect
- real GDP = Y_f
- unemployment = natural rate

Now suppose consumer spending rises, so **AD shifts right**.

#### Short run

- equilibrium real GDP rises above Y_f
- price level rises
- unemployment falls below the natural rate
- the economy has an inflationary gap

#### Long run

Because resources are overstretched:

- wages rise
- other input prices rise
- SRAS shifts left

The final result:

- real GDP returns to Y_f
- price level rises further
- unemployment returns to the natural rate

This is exactly why output cannot stay permanently above LRAS.

Now reverse the story.

Suppose AD shifts left from full-employment equilibrium.

#### Short run

- real GDP falls below Y_f
- price level falls
- cyclical unemployment rises
- the economy has a recessionary gap

#### Long run

Because resources are underused:

- wages and input costs fall
- SRAS shifts right

Final result:

- real GDP returns to Y_f
- price level ends lower than before
- unemployment returns to the natural rate
  > **Test Tip:** On FRQs, write the adjustment as a chain: “AD decreases → recessionary gap → nominal wages fall → SRAS shifts right → output returns to Y_f.” That sequence earns more credit than a one-line answer.

## What shifts LRAS

### Changes in productive capacity

LRAS shifts only when the economy’s productive capacity changes. Price-level changes alone do not shift it. Aggregate demand changes alone do not shift it.

The main LRAS shifters are:

- labor force size
- capital stock
- natural resources
- technology
- productivity
- human capital
- institutions
  > **Key Term: productive capacity**
  > The maximum sustainable output an economy can produce with its available resources, technology, and institutions.

A rightward shift of LRAS means potential GDP has increased. A leftward shift means potential GDP has fallen.

#### Examples that shift LRAS right

- increased immigration expands the labor force
- more business investment raises the capital stock
- better worker education improves human capital
- new technology raises productivity
- stronger property rights encourage investment and efficient production

#### Examples that shift LRAS left

- war or disaster destroys factories and infrastructure
- a pandemic permanently reduces the labor force
- emigration of skilled workers lowers human capital
- weaker institutions reduce investment and productivity
- loss of key natural resources reduces productive capacity

A common AP trick is using disguised wording. The question may not say “resources increased.” It may say “the labor force expands” or “firms invest in new machinery.” You must recognize those as productive-capacity changes.

Also remember that many LRAS shifters usually shift SRAS too. For example, better technology increases long-run potential and also lowers short-run production costs.

### What does not shift LRAS

Do not say LRAS shifts because:

- the price level rises
- inflation increases
- aggregate demand changes
- the Fed changes the money supply
- consumers become more confident

Those may move the economy to a different equilibrium in the short run, but they do not by themselves change long-run productive capacity.

This is a favorite multiple-choice trap. Government spending usually shifts AD, not LRAS. Only if a policy directly increases productive capacity, such as education or infrastructure that raises efficiency over time, should you consider LRAS.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- LRAS is drawn as a vertical line because long-run real GDP does not depend on the price level
- LRAS is located at **Y_f**, the economy’s full-employment output or potential GDP
- In the long run, wages and other input prices fully adjust to changes in the price level
- Full employment means the economy is at the natural rate of unemployment, not 0% unemployment
- Frictional and structural unemployment can exist at full employment, but cyclical unemployment cannot
- Output left of LRAS indicates a recessionary gap
- Output right of LRAS indicates an inflationary gap
- In standard AP long-run adjustment, SRAS shifts until output returns to Y_f
- Aggregate demand changes can alter the long-run price level but not permanently change long-run real GDP
- LRAS shifts only when productive capacity changes
- Main LRAS shifters include labor, capital, natural resources, technology, human capital, productivity, and institutions
- Price-level changes and AD changes alone do not shift LRAS

## Key Terms and Concepts

- long-run aggregate supply (LRAS)
- price level
- full-employment output (Y_f)
- natural rate of unemployment
- recessionary gap
- inflationary gap
- productive capacity


Long-Run Aggregate Supply (LRAS) - LRAS vertical at full employment