AP Macroeconomics Free Response Questions on Consumer Spending and the Multiplier

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 consumer spending?

Consumer spending, or consumption, is the total amount of money households spend on goods and services in an economy. It is a critical component of aggregate demand, alongside investment, government spending, and net exports. Factors like disposable income, consumer confidence, and interest rates influence consumer spending. In AP Macroeconomics, understanding consumer spending is essential for analyzing shifts in aggregate demand and their effects on economic equilibrium. Many AP Macroeconomics free response questions on aggregate supply and demand require students to assess how changes in consumer spending impact GDP, inflation, and unemployment.

You might benefit from checking out our detailed AP Macro Notes on Consumer Spending and The Multiplier.

What is the Multiplier? 

The multiplier is an economic concept that measures the amplified impact of an initial change in spending on the overall economy. For instance, increased government spending can lead to a larger rise in GDP due to subsequent rounds of consumer and business spending. The size of the multiplier depends on the marginal propensity to consume (MPC) and marginal propensity to save (MPS). In AP Macroeconomics, understanding the multiplier is crucial for answering free response questions on aggregate supply and demand, as it helps explain how fiscal policy changes ripple through the economy to influence aggregate demand.

AP Macroeconomics Questions on Consumer Spending and The Multiplier

Question 1

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 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 that consumer spending in Moneyland decreases from $110,000 to $100,000 as a result of a decrease in disposable income in Moneyland from $135,000 to $110,000. (i) Calculate the marginal propensity to consume in Moneyland. Show your work. (ii) Show the short-run effect of the decrease in consumer spending in Moneyland on your graph in part (a), labeling the new equilibrium real output and price level Y2 and PL2, respectively.

(c) Following the decrease in consumer spending, explain how the economy would adjust in the long run in the absence of any policy actions.

Question 2

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 3

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

Answer Key

Question 1

Question 2

Question 3