AP Macroeconomics Practice Exam 2 ❮ 211AP Macroeconomics Practice Exam 2, Section II
Free-Response Questions
Planning time—10 minutes
Writing time—50 minutes
At the conclusion of the planning time, you have 50 minutes to respond to the following three questions.
Approximately half of your time should be given to the first question, and the second half should be divided
evenly between the remaining two questions. Be careful to clearly explain your reasoning and to provide clear
labels to all graph axes and curves.
- The U.S. economy is experiencing a severe reces-
sion, and the budget is currently balanced.
(A) One policy analyst advocates expansionary
tax cuts, while another advocates expansion-
ary government spending. Which of these
policies will have the greatest impact on real
domestic output? Explain how you know.
(B) Choose one of the two proposed policies in
part (A).
i. Based on this policy, will the federal
budget be in a deficit, in a surplus, or
balanced?
ii. Based on your response to (B)(i), state
what happens to interest rates in the
market for loanable funds. Explain.
(C) Assuming that the economy has still not
recovered from the recession, identify one
tool of the Federal Reserve that might stimu-
late the economy.
(D) Using a correctly labeled graph of the money
market, show how the Fed policy identified
in part (C) would affect interest rates.
(E) Explain one factor that might lessen the
effectiveness of the Fed’s monetary policy. - Assume that the European Union (EU) has expe-
rienced lower interest rates, while interest rates in
the United States have remained relatively high.
Explain how these lower real interest rates will
affect each of the following:
(A) The purchase of EU financial assets by
American investors
(B) The international value of the euro (EU
currency)
(C) EU exports of goods and services to the
United States
(D) EU imports of goods and services from the
United States
3. The nation of Melania produces only two goods:
melons and cupcakes. The production possibility
frontier in Melania is concave (bowed outward),
and the nation is currently operating at full
employment.
(A) In a correctly labeled graph, show the pro-
duction possibility frontier in Melania.
i. Identify a combination of melons and
cupcakes that corresponds to full employ-
ment with the point F.
ii. Does the concave production possibility
frontier exhibit constant, increasing, or
decreasing opportunity costs? Explain.
(B) Suppose that the economy of Melania falls
into recession. Identify a combination of
melons and cupcakes that corresponds to a
recession with the point R. Add this point to
the graph.
(C) Suppose that Melania experiences an
improvement in production technology in
growing melons, but this technology has no
impact on the ability to produce cupcakes.
In the graph from part (A), show how this
better technology will affect the production
possibility frontier.