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 Inflation?
Inflation is the rate at which the general level of prices for goods and services in an economy rises over time, leading to a decrease in the purchasing power of money. It is typically measured using indices like the Consumer Price Index (CPI) or the Producer Price Index (PPI). Moderate inflation is normal in a growing economy, but high inflation erodes savings and destabilizes markets, while deflation can indicate economic stagnation. Central banks often aim to maintain a stable inflation rate through monetary policies.
What Factors Influence Inflation?
Several factors drive inflation:
- Demand-Pull Inflation: Occurs when demand for goods and services exceeds supply.
- Cost-Push Inflation: Results from rising production costs, such as wages or raw materials.
- Monetary Factors: An increase in money supply without a corresponding rise in production.
- Global Events: Supply chain disruptions or geopolitical tensions.
Inflation is also influenced by expectations, as businesses and consumers adjust behavior based on anticipated price changes.
What is Price Level?
Price level refers to the average of current prices for goods and services in an economy, measured through price indices like the Consumer Price Index (CPI) or GDP deflator. It provides an overview of inflation or deflation trends and helps policymakers evaluate economic stability. Changes in the price level indicate shifts in purchasing power and economic health. A stable price level is crucial for maintaining consumer confidence, investment, and overall economic growth.
AP Macroeconomics Free Response Questions on Price Level and Inflation
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.
(d) What was the numerical value of the inflation rate from year 1 to year 2 ?
(e) If nominal wages increased by 10% from year 1 to year 2, what happened to the real wages of workers in Louland during this time? Explain.
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.
(c) What was the numerical value of the inflation rate from year 1 to year 2 ?
(d) Assuming that the expected inflation rate between years 1 and 2 was 3%, were each of the following better off, worse off, or unaffected as a result of the economic conditions between year 1 and year 2 ?(i) People living on a fixed income (ii) Borrowers with fixed interest-rate loans. Explain.
Question 3
The economy of Noralandia is in short-run equilibrium with an actual inflation rate that is currently higher than the expected inflation rate.
(a) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium point as X.
(b) The banking system in Noralandia has ample reserves. Identify a specific monetary policy action that the central bank of Noralandia would take to bring the inflation rate closer to the expected inflation 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
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 6
Assume the expected inflation rate in a country is 3%, the current unemployment rate is 6%, and the natural rate of unemployment is 4%.
(a) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X and plot the numerical values above on the graph.
(b) Is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 3%?
(c) Assume loans were made taking into account the expected inflation rate of 3%. Will lenders be better off or worse off after they realize the actual inflation rate identified in part (b) ? Explain.
(d) Based on the relationship between the actual and the expected inflation rates identified in part (a), what will happen to the natural rate of unemployment in the long run?
Question 7
Assume that an economy is in long-run equilibrium. Assume that consumers wish to hold less money because they use credit cards more frequently to purchase goods and services than cash.
(a) Draw a correctly labeled graph of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short run.
(b) Based on the change in the interest rate in part (a), what will happen to each of the following in the short run? (i) Prices of previously issued bonds (ii) The price level and real income. Explain.
(c) With a constant money supply, based on your answer to part b(ii), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate?
(d) If the central bank wishes to reverse the change in the interest rate identified in part (a), what open market operation would it use?
Answer Key
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Mark is an A-Level Economics tutor who has been teaching for 6 years. He holds a masters degree with distinction from the London School of Economics and an undergraduate degree from the University of Edinburgh.