AP Macroeconomics practice questions and exam guide

Increasing the government spending multiplier requires:

1. Higher taxes
2. A higher MPS
3. Lower government spending
4. A higher MPC (more of each additional dollar of income gets spent, amplifying successive rounds)

Answer: D — A higher MPC (more of each additional dollar of income gets spent, amplifying successive rounds)

D) Multiplier = 1/(1−MPC); higher MPC → higher multiplier. B) Reverses (higher MPS = lower multiplier). C/A) Each is unrelated.

An adverse SUPPLY shock will:

1. Lower both price and output
2. Shift AD rightward
3. Shift SRAS rightward
4. Shift SRAS leftward, raising the price level and lowering real GDP (stagflation pattern)

Answer: D — Shift SRAS leftward, raising the price level and lowering real GDP (stagflation pattern)

D) Defines stagflation. B/C) Each reverses direction. A) Confuses adverse and favorable shocks.

Real GDP differs from nominal GDP because real GDP is:

1. Inclusive of intermediate goods
2. Limited to services
3. Adjusted for inflation to reflect changes in output rather than prices
4. Counted only for manufactured goods

Answer: C — Adjusted for inflation to reflect changes in output rather than prices

C) Real vs nominal distinction. A/B/D) Each misstates.

Gross Domestic Product (GDP) measures:

1. The market value of all final goods and services produced within a country in a period
2. The total assets of all households
3. Government spending alone
4. The total population

Answer: A — The market value of all final goods and services produced within a country in a period

A) Standard GDP definition. B–D) Each is a different aggregate.

The Phillips Curve typically shows:

1. A positive relationship between GDP and inflation
2. A short-run INVERSE relationship between unemployment and inflation — but the long-run curve is vertical at the natural rate of unemployment
3. A relationship between savings and investment
4. Money supply and GDP

Answer: B — A short-run INVERSE relationship between unemployment and inflation — but the long-run curve is vertical at the natural rate of unemployment

Short-run Phillips Curve: lower unemployment correlates with higher inflation (trade-off). Long-run Phillips Curve: vertical at the natural rate (no trade-off because expectations adjust). Friedman/Phelps's natural-rate hypothesis — explains stagflation of the 1970s when Phillips curve appeared to break down.

Which of the following is a NORMATIVE economic statement?

1. Unemployment rose to 4.2% last quarter
2. The CPI increased by 3% year over year
3. GDP growth was 2.1% in 2025
4. The Fed should prioritize employment over inflation

Answer: D — The Fed should prioritize employment over inflation

D) 'Should' = value judgment (normative). A/B/C) Factual claims (positive economics).

Persistent budget deficits financed by borrowing can cause long-run:

1. Higher national debt, possible higher long-term interest rates, and reduced national saving and private capital accumulation
2. Lower national debt
3. Always higher economic growth
4. Permanent reduction in inflation

Answer: A — Higher national debt, possible higher long-term interest rates, and reduced national saving and private capital accumulation

A) Debt accumulation effects. B/C/D) Each contradicts standard theory.

A point INSIDE a country's production possibilities frontier indicates:

1. An unattainable combination requiring growth
2. Maximum efficiency
3. Productive inefficiency — resources are underused or unemployed
4. Comparative advantage in both goods

Answer: C — Productive inefficiency — resources are underused or unemployed

C) Inside = inefficient (idle resources). A) Outside the PPF is unattainable. B/D) Each misstates the geometry.

In an open economy, the simple spending multiplier OVERSTATES the true multiplier because it ignores:

1. The savings rate
2. Leakages to imports (MPM) and taxes, which reduce successive spending rounds
3. Crowding in effects
4. Productivity gains

Answer: B — Leakages to imports (MPM) and taxes, which reduce successive spending rounds

B) Open-economy / tax leakages dampen multiplier. A) Partly true but incomplete — savings already in MPS. C/D) Each is unrelated.

If the U.S. dollar APPRECIATES against the euro, what happens?

1. U.S. exports become cheaper for Europeans
2. U.S. EXPORTS become more EXPENSIVE for Europeans; U.S. IMPORTS become cheaper — trade deficit may widen
3. No effect on trade
4. European tourists come to the US

Answer: B — U.S. EXPORTS become more EXPENSIVE for Europeans; U.S. IMPORTS become cheaper — trade deficit may widen

Stronger USD → American goods cost more in euros (exports decline) and European goods cost less in dollars (imports rise). Net exports fall. The Marshall-Lerner condition determines whether trade balance worsens (typically yes if demand elasticities sum > 1).

If the U.S. dollar appreciates against the euro, then:

1. US exports become cheaper
2. No effect on trade
3. Both rise
4. US imports from Europe become cheaper for Americans; US exports become more expensive for Europeans — typically widens trade deficit

Answer: D — US imports from Europe become cheaper for Americans; US exports become more expensive for Europeans — typically widens trade deficit

Stronger dollar: each $ buys more €. American buyers of European goods get more for less. European buyers of US goods need more €. Net: imports up, exports down → trade balance worsens. Depreciation has opposite effect. Affects multinational profits, tourism flows.

A country's growth rate of real GDP per capita is most affected over decades by:

1. Total factor productivity growth (technology), capital deepening, and institutional quality
2. Short-term interest rate decisions
3. Quarterly fiscal stimulus packages
4. Currency interventions

Answer: A — Total factor productivity growth (technology), capital deepening, and institutional quality

A) Solow-model growth fundamentals. B/C/D) Each affects short-run cycle, not long-run trend.

What is dollarization?

Country adopts U.S. dollar as its official currency (Ecuador, El Salvador). Imports U.S. monetary policy.

What's the savings function?

S = Y − T − C. Disposable income minus consumption = savings.

What is the reserve requirement?

Fraction of deposits banks must hold as reserves. Lower rr → banks can lend more.

Why does money demand slope downward?

Higher interest rate → higher opportunity cost of holding money → less money demanded.

Recessionary gap: which monetary policy?

Expansionary — buy bonds, cut discount rate, lower reserve req. Shifts AD right.

AP Macro FRQ: Show the impact of expansionary fiscal policy.

AD shifts right; if SRAS upward-sloping, both Y and P rise. Possibly close recessionary gap.