National income and price determination practice questions (AP Macroeconomics)

Sample questions

6 of the 33 free AP Macroeconomics questions on this unit, from the free AP Macroeconomics Practice Test, the free AP Macroeconomics Multiple Choice Questions with Answers and the free AP Macro Unit 3 Practice Test: National Income and Price Determination. Each answer is behind its own toggle; the whole paper, its PDF and the full answer key are on the exam page.

1. Question 12 marks · AD/AS shifts
   A sharp, sustained decline in stock market wealth will most likely have which of the following short-run effects?
   • A.
     Aggregate demand shifts left, decreasing both the price level and real output
   • B.
     Aggregate demand shifts right, increasing the price level and real output
   • C.
     Short-run aggregate supply shifts left, raising the price level
   • D.
     A movement along the aggregate demand curve, with no shift
   • E.
     Long-run aggregate supply shifts left, reducing potential output
   Show answerFrom the free AP Macroeconomics Practice Test →
2. Question 22 marks · Spending multiplier
   In an economy with a marginal propensity to consume of 0.8, government purchases increase by 20 billion dollars. Assuming no crowding out and a constant price level, the maximum increase in real GDP is:
   • A.
     16 billion dollars
   • B.
     20 billion dollars
   • C.
     25 billion dollars
   • D.
     80 billion dollars
   • E.
     100 billion dollars
   Show answerFrom the free AP Macroeconomics Practice Test →
3. Question 32 marks · Sticky wages & SRAS
   According to the sticky-wage explanation of the upward-sloping short-run aggregate supply curve, an unanticipated fall in the price level reduces output in the short run because:
   • A.
     nominal wages fall immediately, reducing household spending
   • B.
     nominal wages are fixed by contracts, so real wages rise and firms reduce employment
   • C.
     real wages fall, causing workers to quit their jobs
   • D.
     menu costs prevent firms from adjusting their prices
   • E.
     workers instantly renegotiate their contracts to restore the old real wage
   Show answerFrom the free AP Macroeconomics Practice Test →
4. Question 42 marks · Fiscal policy
   An economy is operating in a recessionary gap. Which of the following is a discretionary fiscal policy action that would move the economy toward full employment?
   • A.
     The central bank purchases government bonds on the open market
   • B.
     Unemployment insurance payments rise automatically as layoffs increase
   • C.
     The legislature increases government spending on infrastructure
   • D.
     The legislature raises personal income tax rates
   • E.
     The central bank lowers the interest rate it pays on reserves
   Show answerFrom the free AP Macroeconomics Practice Test →
5. Question 510 marks · AD/AS, fiscal policy & crowding out
   Fiscal policy in a recession. The economy of Alandia is in short-run equilibrium with real GDP of 480 billion dollars, while full-employment output is 500 billion dollars. The marginal propensity to consume is 0.75. The government is considering a change in its purchases of goods and services, financed by borrowing, to close the gap.
   $Y = 480, \qquad Y_f = 500 \text{ (billions of dollars)}, \qquad MPC = 0.75$
   (a)

   Identify whether Alandia is experiencing a recessionary or an inflationary gap, and state its size. Describe how this situation would appear on a correctly labeled aggregate demand–aggregate supply graph.

   [2]
   (b)

   Calculate the minimum increase in government purchases needed to close the output gap. Show your work.

   [3]
   (c)

   Using the money market, explain how the increase in government purchases will affect the nominal interest rate in the short run.

   [2]
   (d)

   Explain how the interest-rate change in part (c) affects private investment, what this implies for the actual change in real GDP relative to your answer in part (b), and how it affects Alandia's rate of long-run economic growth.

   [3]
   Show answerFrom the free AP Macroeconomics Practice Test →
6. Question 61 mark · AD–AS model
   Which of the following would cause the price level to fall and real GDP to rise in the short run?
   • A.
     An increase in government purchases of goods and services
   • B.
     An increase in nominal wages negotiated in new labor contracts
   • C.
     A fall in the world price of imported oil and raw materials
   • D.
     A decrease in the money supply
   • E.
     An increase in consumer confidence
   Show answerFrom the free AP Macroeconomics Multiple Choice Questions with Answers →

The other 27 are in the free exams: the free AP Macroeconomics Practice Test, the free AP Macroeconomics Multiple Choice Questions with Answers and the free AP Macro Unit 3 Practice Test: National Income and Price Determination.

Key terms

The definitions and formulas AP Macroeconomics expects for national income and price determination, typeset as they appear on the paper.

Aggregate demand (AD)

Total spending on domestic output at each price level. It slopes down because of the wealth effect, the interest-rate effect and the exchange-rate effect; changes in C, I, G or net exports shift it.

$$AD = C + I + G + (X - M)$$

Short-run aggregate supply (SRAS)

Upward sloping because wages and some input prices are sticky in the short run, so a higher price level raises profit margins and output. Input prices, productivity and expectations shift it.

Long-run aggregate supply (LRAS)

Vertical at potential (full-employment) output, because in the long run all prices adjust and output is set by resources and technology. Draw it as a vertical line labeled at $Y_f$; the point for an output gap depends on it.

Spending multiplier

The total change in real GDP per dollar of initial spending change, from successive rounds of induced consumption. A larger marginal propensity to consume gives a larger multiplier.

$$k = \frac{1}{1 - MPC} = \frac{1}{MPS}$$

Tax multiplier

Smaller in absolute value than the spending multiplier and opposite in sign, because the first round of a tax change is partly saved. Equal-sized spending and tax changes do not cancel.

$$k_T = -\frac{MPC}{1 - MPC}$$

Long-run self-adjustment

With no policy response, a recessionary gap lowers wages and input prices over time, shifting SRAS right until output returns to potential at a lower price level; an inflationary gap does the reverse.

Fiscal policy and automatic stabilizers

Discretionary fiscal policy changes government spending or taxes to close an output gap. Automatic stabilizers (income taxes, unemployment benefits) move the budget toward deficit in recessions without new legislation.

Frequently asked questions

Other AP Macroeconomics topics

• Basic economic concepts
• Economic indicators and the business cycle
• Financial sector
• Long-run consequences of stabilization policies
• Open economy: international trade and finance

All AP Macroeconomics topics · All free practice exams