AP Macroeconomics Free Response Questions on Aggregate Supply and Demand

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 Aggregate Supply?

Aggregate supply (AS) refers to the total quantity of goods and services that producers in an economy are willing and able to supply at various price levels during a given period. It’s depicted as a curve that can shift due to changes in input costs, technological advancements, or government policies. Understanding aggregate supply is essential for analyzing economic scenarios in AP Macroeconomics free response questions on aggregate supply and demand, as it helps explain production capacity and economic growth.

You might find it helpful to check out our comprehensive AP Macro Notes on Aggregate Supply and Aggregate Demand.

What is Aggregate Demand?

Aggregate demand (AD) represents the total quantity of goods and services demanded across all sectors of an economy at various price levels within a specific period. It’s the sum of consumption, investment, government spending, and net exports. Aggregate demand plays a central role in AP Macroeconomics free response questions on aggregate supply and demand, helping students analyze changes in economic equilibrium. Factors like fiscal policies, interest rates, and consumer confidence can shift the aggregate demand curve, impacting economic outcomes such as GDP and unemployment.

AP Macroeconomics Free Response Questions on Aggregate Supply and Demand

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%.

(b) Draw a correctly labeled graph of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for Alpha, and show each of the following. (i) The current equilibrium output and price level, labeled Y1 and PL1, respectively (ii) The full-employment output, labeled YF

Question 2

Assume that the economy of Moneyland is in equilibrium with an actual unemployment rate equal to the natural rate of unemployment.

(a) Draw a correctly labelled 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, labelled Y1 and PL1, respectively (ii) The full employment output, labelled YF

Question 3

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

Question 4

Assume that the economy of country Zen is in long-run macroeconomic equilibrium.

(b) On your graph in part (a), show the short-run effect of an increase in consumer confidence. Label the new equilibrium real output Y2 and the new equilibrium price level PL2.

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 the United States economy is in short-run macroeconomic equilibrium at an output level greater than potential output.

(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 as Y1 and PL1, respectively (ii) The full-employment output, labeled as YF

(b) Assume government spending increases by $100 billion. On your graph in part (a), show the short-run effect of the change in government spending on the equilibrium real output and price level. Label the new equilibrium output as Y2 and the new equilibrium price level as PL2.

(c) Assume the marginal propensity to consume is 0.8. As a result of the increase in government spending, what is the numerical value of the maximum change in each of the following in the short run? (i) Real output (ii) Household savings

(d) Draw a correctly labeled graph of the money market and show the effect of the change in real output identified in part (c)(i) on the equilibrium nominal interest rate.

(e) Based on the change in the nominal interest rate shown in part (d), what will happen to the prices of previously issued bonds in the short run?

(f) The United States and the European Union are trading partners with flexible exchange rates. The currency in the United States is the dollar, and the currency in the European Union is the euro. Assume the inflation rate in the United States increases relative to the inflation rate in the European Union. As a result of the change in the United States inflation rate, what will happen to each of the following in the foreign exchange market? (i) The demand for dollars. Explain. (ii) The international value of the dollar

(g) Suppose the Federal Reserve attempts to keep the value of the dollar constant in the foreign exchange market. Based on the change in the value of the dollar in part (f)(ii), should the Federal Reserve buy or sell each of the following? (i) The euro (ii) The dollar

Question 7

Assume the economy of Sweden is in long-run equilibrium and has a surplus in its current account.

(a) Is the Swedish capital and financial account in deficit, in surplus, or in balance? Explain.

(b) Draw a correctly labeled graph of short-run aggregate supply, long-run aggregate supply, and aggregate demand curves for Sweden, and show the current equilibrium real output, labeled Y1, and the current equilibrium price level, labeled PL1.

(c) Assume the United Kingdom decreases its imports from Sweden. On your graph in part (b), show the new equilibrium real output, labeled Y2, and the new equilibrium price level, labeled PL2, as a result of this change.

(d) As a result of the decrease in the United Kingdom’s imports from Sweden, would policy makers in Sweden be more concerned about cyclical unemployment or inflationary pressures in the short run? Explain.

(e) If the Swedish central bank’s goal is to return the economy to long-run equilibrium, what open-market operation should it use?

(f) The currency of the United Kingdom is the pound, and the currency of Sweden is the krona. Draw a correctly labeled graph of the foreign exchange market for the krona, and show the impact of the decrease in the United Kingdom’s imports from Sweden on the value of the krona in the foreign exchange market.

(g) If the Swedish central bank’s goal is to reverse the exchange rate change shown in part (f) by changing the interest rate, what open-market operation should it use?

(h) Explain how the open-market operation identified in part (g) would reverse the change in the exchange rate.

Question 8

Assume Smithland is in short-run equilibrium at a level of output that exceeds the full-employment level of output.

(b) Assume Smithland’s government cuts individual income taxes. On your graph in part (a), show the short-run effect of the tax cut on equilibrium real output, labeling the new short-run equilibrium real output Y2.

(c) Based solely on the change in real output on your graph in part (b), what will happen to each of the following in the short run? (i) The natural rate of unemployment (ii) Nominal interest rates. Explain.

(d) Assume instead the central bank intervenes to correct an inflationary output gap. What open-market operation should the central bank take?

(e) Draw a correctly labeled graph of the money market, and show the effect of the open-market operation identified in part (d) on the nominal interest rate.

(f) Based solely on the interest rate change identified in part (e), what will happen to the international value of Smithland’s currency in the foreign exchange market? Explain.

(g) Based solely on the exchange rate change identified in part (f), will Smithland’s imports increase, decrease, or remain the same? Explain.

Question 9

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 10

Assume the economy of Artland is currently operating above full employment.

(a) Draw a correctly labeled graph of the short-run aggregate supply, long-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) The full-employment output, labeled as Yf

(b) Assume the central bank and the government do not take any policy actions to close the output gap. (i) On your graph in part (a), show how the economy automatically adjusts in the long run and label the new equilibrium price level PL2. (ii) Explain the cause of the adjustment shown in part (b)(i).

(c) Alternatively, suppose the government wants to close the output gap using fiscal policy. (i) Identify a fiscal policy action the government could implement to close the output gap. (ii) How will the fiscal policy action identified in part (c)(i) affect the following? – The unemployment rate – The natural rate of unemployment (iii) In closing the output gap, will the automatic adjustment identified in part (b)(i) produce a higher, a lower, or the same price level compared to the fiscal policy identified in part (c)(i) ?

(d) Draw a correctly labeled graph of the market for loanable funds. Show the effect of the fiscal policy action identified in part (c)(i) on the equilibrium real interest rate.

(e) Given the interest rate change identified in part (d), will the long-run aggregate supply curve shift to the right, shift to the left, or remain the same in the long run? Explain.

Question 11

Assume the United States economy is in recession.

(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) Current price level, labeled PL1 (ii) Current output, labeled Y1

(b) Now assume the euro zone, a major trading partner of the United States, enters into a recession. (i) What will be the effect on United States exports to the euro zone? Explain. (ii) On your graph in part (a), show the effect of the change identified in part (b)(i) on real output in the United States. (iii) What will be the effect of the change identified in part (b)(ii) on unemployment in the United States?

(c) Assume the euro zone recession causes a decrease in the demand for United States dollars in the foreign exchange market. (i) Will the euro appreciate, depreciate, or remain unchanged against the dollar? Explain. (ii) Draw a correctly labeled graph of the foreign exchange market for dollars, and show the effect of the decrease in the demand for dollars on the exchange rate for dollars.

(d) Assume the United States implements a combination of expansionary fiscal and monetary policies. In the absence of complete crowding out, what will be the effect of these policies on each of the following? (i) Aggregate demand in the United States (ii) The price level in the United States. (iii) Interest rates in the United States. Explain.

Question 12

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

(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 13

3. A country is at full employment and produces two types of goods: consumer goods and capital goods.

(a) Draw a correctly labeled graph of the production possibilities curve, with consumer goods on the horizontal axis and capital goods on the vertical axis. Indicate a point on your graph, labeled X, that represents full employment and a possible combination in which both goods are being produced.

(b) Assume there is an increase in the country’s national savings. Draw a correctly labeled graph of the loanable funds market, showing the change in the real interest rate from the increase in savings.

(c) On the same graph from part (a), show another point, labeled Z, that represents full employment and a new combination of consumer goods and capital goods consistent with the increase in the country’s national savings.

(d) Referring to your answer to part (c), will the long-run aggregate supply curve shift to the right, shift to the left, or remain the same? Explain.

Question 14

Assume that the United States economy is operating below full employment.

(a) Draw a correctly labeled graph of long-run aggregate supply, short-run aggregate supply, and aggregate demand, and show each of the following. (i) Current equilibrium output and price level, labeled as Y1 and PL1 (ii) Full-employment output, labeled as Yf

(b) Assume that the Federal Reserve targets a new federal funds rate to reach full employment. Should the Federal Reserve target a higher or lower federal funds rate?

(c) Given the Federal Reserve action you identified in part (b), draw a correctly labeled graph of the money market and show the effect on the nominal interest rate.

(d) The policy makers pursue a fiscal policy rather than the monetary policy in part (b). Assume that the marginal propensity to consume is 0.8 and the value of the recessionary gap is $300 billion. (i) If the government changes its spending without changing taxes to eliminate the recessionary gap, calculate the minimum required change in government spending. (ii) If the government changes taxes without changing government spending to eliminate the recessionary gap, will the minimum required change in taxes be greater than, smaller than, or equal to the minimum required change in government spending in part (d)(i) ? Explain.

(e) Assume the government lowers income tax rates to eliminate the recessionary gap. Will each of the following increase, decrease, or stay the same? (i) Aggregate demand. Explain. (ii) Long-run aggregate supply. Explain.