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 balance of payments?
The balance of payments (BOP) is a record of all economic transactions between a country and the rest of the world over a specific period. It consists of two main components: the current account and the capital account. These accounts track trade in goods and services, investment flows, and transfers. In AP Macroeconomics free response questions on trade, balance of payments, and exchange rates, understanding the BOP is crucial for analyzing how economic activity impacts a nation’s financial position and currency stability.
You may also want to check out our detailed AP Macro Notes on Trade, Balance of Payments, and Exchange Rates.
What is the current account?
The current account is a component of the balance of payments that tracks a country’s trade in goods and services, net income from abroad, and net transfers like foreign aid. A surplus indicates more exports than imports, while a deficit signals the opposite. In AP Macroeconomics free response questions on trade, balance of payments, and exchange rates, understanding the current account is essential for analyzing trade policies, economic imbalances, and their effects on aggregate demand and currency valuation.
What is the capital account?
The capital account, part of the balance of payments, records financial transactions such as investments, loans, and asset purchases between a country and others. It complements the current account, ensuring that the balance of payments always equals zero. In AP Macroeconomics free response questions on trade, balance of payments, and exchange rates, analyzing the capital account helps students understand how foreign investments and financial flows impact a country’s economy and currency value.
What is the exchange rate?
The exchange rate is the value of one currency expressed in terms of another. It determines how much foreign currency can be obtained for a unit of domestic currency. Exchange rates can be fixed, floating, or managed. In AP Macroeconomics free response questions on trade, balance of payments, and exchange rates, students often analyze how changes in exchange rates affect trade balances, capital flows, and overall economic performance, making it a critical concept for understanding international economics.
AP Macroeconomics Free Response Questions on Trade, Balance of Payments, and Exchange Rates
Question 1
Assume Malaysia’s economy is in a recession and its government currently has a balanced budget.
(c) Malaysia and Japan are trading partners with flexible exchange rates. Malaysia’s currency is the ringgit (MYR), and Japan’s currency is the yen (JPY). Draw a correctly labeled graph of the foreign exchange market for the ringgit relative to the yen. Show the effect of the change in the real interest rate identified in part (b) on the international value of the ringgit.
(d) As a result of the change in the value of the ringgit shown in part (c), will Malaysia’s imports increase, decrease, or remain the same? Explain.
Question 2
Assume that Jamaica has a cyclical unemployment rate of 4% and a balanced capital and financial account (CFA).
(a) Identify a specific fiscal policy action that Jamaica’s government would take to bring its economy to full employment.
(b) Based solely on the short-run change in real output resulting from the fiscal policy action identified in part (a), what will happen to Jamaica’s net exports? Explain.
(c) Assume that Jamaica and Turkey are trading partners with flexible exchange rates. Jamaica’s currency is the Jamaican dollar (JMD), and Turkey’s currency is the lira (TRY). Draw a correctly labeled graph of the foreign exchange market for the Jamaican dollar relative to the lira, and show the effect of the change in net exports identified in part (b) on the supply of the Jamaican dollar and the international value of the Jamaican dollar.
(d) How will the change in net exports identified in part (b) affect Jamaica’s capital and financial account (CFA)? Explain.
Question 3
The United States and South Africa are trading partners with flexible exchange rates, and the United States current account balance with South Africa is zero.
(a) Assume real income in the United States increases while real income in South Africa remains the same. Will United States net exports increase, decrease, or remain unchanged? Explain.
(b) Based on your answer to part (a), what will happen to each of the following? (i) The capital and financial account balance in the United States (ii) Actual unemployment in South Africa in the short run. Explain.
(c) The currency of the United States is the dollar (USD), and the currency of South Africa is the rand (ZAR). Draw a correctly labeled graph of the foreign exchange market for the rand and show the effect of the increase in real income in the United States on the international value of the rand.
Question 4
Italy and Japan are trading partners and have flexible exchange rates. The Italian currency is the euro and the Japanese currency is the yen.
(a) Suppose that the exchange rate between the euro and the yen is 1 euro = 100 yen. What is the price of an Italian coat in yen if the coat costs 120 euros in Italy?
(b) Assume that real interest rates increase in Japan. Identify what will happen to net financial capital flows between Italy and Japan.
(c) Draw a correctly labeled graph of the foreign exchange market for the yen and show the effect of the increase in real interest rates in Japan on the value of the yen.
(d) Based solely on the change in the exchange rate identified in part (c), what will happen to Italy’s exports to Japan? Explain
Question 5
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 6
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 7
Assume Smithland is in short-run equilibrium at a level of output that exceeds the full-employment level of 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 Y1 and PL1, respectively (ii) The full-employment output, labeled YF
(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 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
Assume that households in Econland increase their savings for retirement.
(a) Using a correctly labeled graph of the loanable funds market, show how the increase in savings will affect the equilibrium real interest rate.
(b) Based solely on the real interest rate change identified in part (a), what will happen to Econland’s purchases of foreign assets? Explain.
(c) Consider the foreign exchange market for Econland’s currency. (i) Based on your answer to part (b), what will happen to the international value of Econland’s currency? (ii) Based on your answer to part c (i), would Econland’s central bank buy or sell its currency in the foreign exchange market to offset the change in the value of its currency?
Question 10
The European Union and the United States are trading partners.
(a) If the current account balance is zero, will an increase in United States real income result in a current account surplus, deficit, or no change? Explain.
(b) Draw a correctly labeled graph of the foreign exchange market for the euro. On your graph, show the effect of the increase in United States real income on the value of the euro relative to the United States dollar.
(c) Now assume interest rates increase in the European Union. (i) What is the effect of the increase in interest rates in the European Union on the demand for the United States dollar? Explain. (ii) Based on your answer to part (c)(i), what is the effect on the value of the United States dollar relative to the euro?
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
1. 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).
Question 13
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.
Question 14
Exchange rates and interest rates are important for macroeconomic decision making.
(a) How does an increase in Japan’s government budget deficit affect each of the following? (i) The real interest rate in the short run in Japan. Explain. (ii) Private domestic investment in plant and equipment in Japan
(b) Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following. (i) Supply of euros. Explain. (ii) Yen price of the euro
(c) To reverse the change in the yen price of the euro identified in part (b)(ii), should the European Central Bank buy or sell euros in the foreign exchange market?
Answer Key
Question 1
Question 2
Question 3
Question 4
Question 5
Question 6
Question 7
Question 8
Question 9
Question 10
Question 11
Question 12
Question 13
Question 14
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.