Month: January 2025

What is AP Macroeconomics? AP Macroeconomics is a high school course designed to teach students the fundamentals of economics at a macro level. It covers GDP, unemployment, inflation, monetary and fiscal policies, and international trade. A major component of the course includes understanding aggregate supply and demand, and tools for analyzing economic fluctuations. The course culminates in the AP exam, which features multiple-choice and free response questions, including scenarios involving aggregate supply and demand. Mastering these topics can help students earn college credit and better prepare for advanced economics courses. Where did we get these AP Macroeconomics free response questions on aggregate supply and demand? The AP Macroeconomics free response questions on aggregate supply and demand provided here are sourced from official College Board exams and teacher-developed practice materials. These questions are carefully selected to align with key concepts covered in the AP Macroeconomics curriculum. Each question focuses on scenarios analyzing aggregate supply, aggregate demand, or shifts in either curve due to various economic changes. By practicing with these real and high-quality examples, students can enhance their understanding, test-taking skills, and overall readiness for the AP exam. How to use these AP Macroeconomics free response questions Use these AP Macroeconomics free response questions on aggregate supply and demand to maximize your learning as timed practice. Start by reading the question carefully, then outline your answer with clear labels and diagrams where necessary. Focus on explaining shifts in aggregate supply or demand and the resulting impact on equilibrium output, price levels, and the economy. Review the scoring rubric to understand how points are awarded. Practicing consistently with these questions will boost your confidence and help you ace the AP exam. What is the workforce? The workforce, also called the labor force, includes all individuals aged 16 and older who are either employed or actively seeking employment. It excludes retirees, full-time students not working, and discouraged workers who’ve stopped job hunting. Understanding the workforce is vital for AP Macroeconomics free response questions on employment and the workforce, as it helps analyze labor market trends, participation rates, and economic productivity. Factors like education, demographics, and economic conditions influence the size and quality of the workforce, directly impacting aggregate supply and overall economic growth. What is the unemployment rate? The unemployment rate measures the percentage of the labor force that is actively seeking but unable to find work. It is calculated by dividing the number of unemployed individuals by the total labor force and multiplying by 100. This metric is a key indicator of economic health and is frequently analyzed in AP Macroeconomics free response questions on employment and the workforce. Changes in the unemployment rate can signal shifts in aggregate demand, labor market efficiency, or broader economic trends, making it a critical focus for evaluating economic policies and performance. What is the natural rate of unemployment? The natural rate of unemployment refers to the unemployment level that exists when the economy is at full employment, accounting for frictional and structural unemployment but excluding cyclical unemployment. It represents a healthy, stable labor market where resources are efficiently allocated. In AP Macroeconomics free response questions on employment and the workforce, understanding the natural rate of unemployment is essential for evaluating policies and their impact on aggregate supply, inflation, and long-term economic equilibrium. Changes in technology, education, or labor market policies can influence this rate over time. AP Macroeconomics Free Response Questions on Employment and the Workforce Question 1 The economy of Alpha is in short-run equilibrium with a cyclical unemployment rate of 3%, a frictional unemployment rate of 4%, and an actual unemployment rate of 8%. (a) Calculate Alpha’s natural rate of unemployment. Show your work. (c) Assume that policymakers take no action to close the output gap. (i) Explain how Alpha’s economy will adjust to full employment in the long run. (ii) On an aggregate supply diagram, show how Alpha’s economy will adjust to full employment in the long run, labeling the new equilibrium price level PL2. Question 2 Assume the economy of Vanderlandia is in short-run equilibrium with a real GDP of $500 million. The full-employment level of real GDP is $550 million. (a) Draw a correctly labeled graph of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, and show each of the following. (i) The current equilibrium real output and price level, labeled Y1 and PL1, respectively (ii) The full-employment output, labeled YF (b) Assume no policy action is taken to restore full employment. (i) Explain how the economy will adjust in the long run. (ii) Following the long-run adjustment process, will the price level in Vanderlandia be greater than, less than, or equal to PL1 shown on your graph in part (a)? (c) Assume instead that policymakers in Vanderlandia are considering changing government spending to restore full employment in the short run and that the marginal propensity to save is 0.2. (i) Calculate the minimum change and state the direction of change in government spending required to completely close the output gap in the short run. Show your work. (ii) On your graph in part (a), show the short-run effect of the change in government spending in part (c)(i), labeling the new equilibrium price level PL2. Question 3 Assume that in the country of Zeta, the civilian noninstitutional population aged 16 and over is 1,000,000. The labor force participation rate is 70%, the unemployment rate is 9%, and the natural rate of unemployment is 5%. (a) Calculate the number of people in Zeta that are unemployed. Show your work. (b) Is the economy of Zeta currently experiencing a recessionary gap, an inflationary gap, or no output gap? Explain. (c) Consumer goods and capital goods are produced in the country of Zeta. Draw a correctly labeled graph of the production possibilities curve for Zeta. Indicate a point, labeled A, that represents the current state of Zeta’s economy. (d) If some individuals who are counted as unemployed in Zeta stop looking for work, what will happen to each of the following? (i) The labor force participation rate. Explain. (ii) The unemployment rate. Question 4 The economy of Northland is in short-run equilibrium with an actual unemployment rate of 7% and an actual inflation rate of 1%. The natural unemployment rate in Northland is 5%. (a) Using the relevant numerical values given, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium point as X. Plot the relevant numerical values provided on the graph. (b) Is the expected inflation rate greater than, less than, or equal to 1% ? Explain. (c) Assume the marginal propensity to consume is 0.9. (i) If the government decreases income taxes by $20 billion, calculate the maximum change in aggregate demand. Show your work. (ii) If instead the government increases spending by $20 billion, calculate the maximum change in aggregate demand. Show your work. (d) On your graph in part (a), show a possible new short-run equilibrium point labeled Z that would result if the government increases spending and there is no change in inflationary expectations. (e) How would an increase in unemployment compensation affect aggregate demand in the short run? Explain. (f) Assume instead the government takes none of the preceding policy actions. (Northland is still in short-run equilibrium; the actual unemployment rate is 7%, the actual inflation rate is 1%, and the natural unemployment rate is 5%.) What will happen to each of the following in the long run? (i) The short-run aggregate supply curve. Explain. (ii) The short-run Phillips curve (iii) The actual unemployment rate Question 5 Assume a country’s economy is operating below full employment. (a) Draw a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, and show each of the following. (i) The current equilibrium real output and price level, labeled as Y1 and PL1, respectively (ii) The full-employment output, labeled as YF (b) Identify one fiscal policy action the country’s government can take to restore full employment. (c) Assume instead that no fiscal policy action is taken. Suppose a change in investment spending causes real GDP to increase by $ 200 billion. Calculate the minimum change in investment spending that could have caused this increase in real GDP if the marginal propensity to save is 0.25. Show your work. (d) Assume the output gap was initially $ 800 billion. On your graph in part (a), show the short-run effect of the change in investment spending identified in part (c), labeling the new equilibrium real output as Y2 and the new equilibrium price level as PL2. (e) Given your answer to part (d), is the actual rate of unemployment greater than, less than, or equal to the natural rate of unemployment? Explain. (f) Assume that private savings now increase. Draw a correctly labeled graph of the loanable funds market and show the effect of the increase in private savings on the real interest rate. (g) Based solely on the change in the real interest rate shown in part (f), what will happen to each of the following? (i) Real GDP in the short run. Explain. (ii) Long-run aggregate supply. Explain. Question 6 Assume a country’s economy is currently operating below full employment. (a) Identify a fiscal policy action the country’s government could implement to restore full employment. (b) Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy action identified in part (a) on the equilibrium real interest rate. (c) Based solely on the real interest rate change shown in part (b), what will happen to each of the following? (i) Net exports. Explain. (ii) The stock of physical capital. Explain. Question 7 Flowerland is an open economy with a flexible exchange rate regime. The natural rate of unemployment is 5%, the frictional rate of unemployment is 4%, and the actual rate of unemployment is 7%. (a) What is the numerical value of the cyclical rate of unemployment in Flowerland? (b) Assume the foreign demand for lavender oil produced in Flowerland increases. What will happen to each of the following in Flowerland in the short run? (i) Aggregate demand. Explain. (ii) Cyclical unemployment. The table shows the market basket quantities and prices of lavender oil and roses, the only two goods produced in Flowerland. (c) Assume 2019 is the base year. Based on the data in the table, calculate the price index for year 2020 in Flowerland. Show your work. (d) If nominal income in Flowerland increased by 20% from 2019 to 2020, will the standard of living of the average citizen of Flowerland increase, decrease, or stay the same from 2019 to 2020 ? Explain. Question 8 Canada is an open economy that is currently in a recessionary output gap. (a) Draw a correctly labeled graph of the long-run aggregate supply, short-run aggregate supply, and aggregate demand curves, and show each of the following. (i) The current equilibrium real output and price level, labeled as Y1 and PL1, respectively (ii) Full-employment output, labeled Yf (b) The central bank and the government do not take any policy actions to close the output gap. (i) Explain how the economy will adjust to full employment in the long run. (ii) On your graph in part (a), show how the economy adjusts to full employment in the long run. (c) Suppose the Canadian government is unwilling to wait for the long-run adjustment process. The marginal propensity to consume is 0.8. The equilibrium real output is $500 billion and the full-employment output is $540 billion. (i) Calculate the minimum change and indicate the direction of change in government spending required to shift the aggregate demand curve by the amount of the output gap. (ii) Calculate the minimum change and indicate the direction of change in taxes required to shift the aggregate demand curve by the amount of the output gap. (d) Assume instead that the Canadian central bank takes actions to restore the economy to full-employment output by influencing investment spending. Draw a correctly labeled graph of the money market, and show the effect of the actions taken by the central bank on the equilibrium interest rate. (e) Canada and Mexico are trading partners. Draw a correctly labeled graph of the foreign exchange market of the Canadian dollar, and show the effect of the change in the interest rate in part (d) on the value of the Canadian dollar with respect to the Mexican peso Question 9 Countries face trade-offs between producing consumer goods and producing capital goods. (a) Country X takes one hour to produce a unit of consumer goods and two hours to produce a unit of capital goods. Country Y takes two hours to produce a unit of consumer goods and four hours to produce a unit of capital goods. Which country has a comparative advantage in the production of consumer goods? Explain. The following table shows labor-market data for Country X. (b) Calculate the unemployment rate in Country X. Show your work. (c) Calculate the labor force participation rate in Country X. Show your work. (d) Draw a correctly labeled graph of the production possibilities curve for Country X, with consumer goods on the horizontal axis and capital goods on the vertical axis. Indicate a point on your graph, labeled Z, that reflects the current level of unemployment. Question 10 Assume that the economy of Country X has an actual unemployment rate of 7%, a natural rate of unemployment of 5%, and an inflation rate of 3%. (a) Using the numerical values given above, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point B. Plot the numerical values above on the graph. (b) Assume that the government of Country X takes no policy action to reduce unemployment. In the long run, will each of the following shift to the right, shift to the left, or remain the same? (i) Short-run aggregate supply curve. Explain. (ii) Long-run Phillips curve (c) Identify a fiscal policy action that could be used to reduce the unemployment rate in the short run. (d) Draw a correctly labeled graph of aggregate demand and short-run aggregate supply, and show the impact on the equilibrium price level and real gross domestic product (GDP) of the fiscal policy action identified in part (c). (e) Based on the change in real GDP identified in part (d), will the supply of Country X’s currency in the foreign exchange market increase, decrease, or remain the same? Explain. (f) Based on your answer to part (e) and assuming a flexible exchange rate system, will Country X’s currency appreciate, depreciate, or remain the same in the foreign exchange market? Question 11 Assume that the United States economy is currently in a short-run equilibrium with the actual unemployment rate above the natural rate of unemployment. (a) Draw a single correctly labeled graph with both the long-run Phillips curve and short-run Phillips curve. Label the current short-run equilibrium point P. (b) Assuming no policy actions are taken, will the short-run Phillips curve shift to the right (upward), shift to the left (downward), or remain the same in the long run? Explain. (c) If the Federal Reserve Bank wants to lower unemployment, what expansionary open-market operation should it use? (d) How will the open-market operation you identified in part (c) affect each of the following? (i) Federal funds rate. Explain. (ii) Real interest rate in the short run. (e) Given your answer in part (d)(ii), what is the effect on real gross domestic product (GDP) in the short run? Explain. (f) Japan and the United States are major trading partners. Indicate how the change in real GDP you identified in part (e) will affect the demand for the Japanese yen in the foreign exchange market. (g) Draw a correctly labeled graph of the foreign exchange market for the Japanese yen, showing the effect of the change in demand identified in part (f) on the value of the Japanese yen relative to the United States dollar. Answer Key Question 1 Question 2 Question 3 Question 4 Question 5 Question 6 Question 7 Question 8 Question 9 Question 10 Question 11