AP Macroeconomics Free Response Questions on GDP

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 GDP?

Gross Domestic Product (GDP) is a key economic indicator that measures the total monetary value of all goods and services produced within a country’s borders over a specific time period. It reflects the size and health of an economy and is used to compare economic performance across countries and time periods. GDP can be calculated using three approaches: the production approach, income approach, and expenditure approach. Understanding GDP is vital for analyzing economic trends, setting policies, and evaluating living standards.

You might benefit from checking out our comprehensive AP Macro Notes on Gross Domestic Product (GDP).

The Components of GDP

GDP comprises four main components: Consumption, Investment, Government Spending, and Net Exports (Exports minus Imports).

1. Consumption: Household spending on goods and services.
2. Investment: Business expenditures on capital goods, residential construction, and inventories.
3. Government Spending: Expenditures on public services and infrastructure.

Net Exports: The value of exports minus imports.
These components provide insight into the drivers of economic activity and help identify areas of growth or concern.

AP Macroeconomics Free Response Questions on GDP

Question 1

The table provided shows economic data for the country of Louland. The base year is year 1, and the GDP deflator in year 2 is 115. Year 1 Year 2 Nominal GDP 800,000 1,035,000 Population 1,000 1,200 

(a) Calculate real GDP in Louland in year 2. Show your work. (b) How would the change in real GDP from year 1 to year 2 affect the demand for money and the nominal interest rate in Louland? (c) Did the standard of living of the average citizen in Louland increase, decrease, or remain the same from year 1 to year 2 ? Explain using numbers.

Question 2

The table provided shows the quantity and price of food and clothing, the only two goods produced and consumed in the country of Maltrose, in year 1 and year 2. Assume that year 1 is the base year. 

(a) Calculate the nominal GDP in year 2. Show your work. (b) Calculate the GDP deflator in year 2. Show your work.

Question 3

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 4

The table below shows macroeconomic data for Country A. Year Nominal GDP GDP Deflator Population 2020 40,000 100 100 2021 88,000 200 110 

(a) Calculate each of the following for Country A in year 2021. Show your work. (i) Real GDP (ii) Real GDP per capita 

(b) Based solely on the data provided, has the standard of living for the average person in Country A increased, decreased, or stayed the same between 2020 and 2021 ? Explain. 

(c) How would an increase in government spending on education affect economic growth in Country A? Explain. 

(d) Assume that Country A produces consumer goods and capital goods. Draw a correctly labeled production possibilities curve for Country A, and show the effect of the increase in government spending on education on your graph.

Question 5

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 6

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 2

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Question 6