What is AP Macroeconomics?
AP Macroeconomics is a high school–level economics course that focuses on how economies operate at the national and international level. Students study GDP, unemployment, inflation, monetary and fiscal policy, and international trade, with a strong emphasis on how economies interact through global markets.
The AP exam evaluates these ideas using multiple-choice questions and free response questions (FRQs) that require students to interpret diagrams, explain economic mechanisms, and evaluate policy outcomes.
Where did we get these AP Macroeconomics free response questions?
The AP Macroeconomics free response questions on trade, balance of payments, and exchange rates on this page are drawn from official College Board exams and closely aligned practice materials. Each question reflects the structure, phrasing, and analytical depth students should expect on the AP exam.
For a complete list of AP Macroeconomics free response questions organised by topic, visit the AP Macroeconomics hub page.
How to use these AP Macroeconomics free response questions
These AP Macroeconomics free response questions on trade and exchange rates are most effective when used as timed exam practice. Students should practice explaining how currency values, trade balances, and financial flows interact, while clearly labeling any required diagrams.
Because exchange rates are closely connected to monetary policy and interest rates, students may also benefit from reviewing AP Macroeconomics free response questions on monetary policy.
What is the balance of payments?
The balance of payments (BOP) is a comprehensive record of all economic transactions between a country and the rest of the world over a given period. It is divided primarily into the current account and the capital account, which together track trade flows, income transfers, and financial investments.
In AP Macroeconomics free response questions on trade, balance of payments, and exchange rates, the BOP is essential for analyzing how international transactions affect currency values and macroeconomic stability.
What is the current account?
The current account records trade in goods and services, net income from abroad, and net transfers such as foreign aid. A current account surplus indicates that exports exceed imports, while a deficit suggests the opposite.
Understanding the current account is central to AP Macroeconomics free response questions that examine trade imbalances, exchange rate movements, and aggregate demand, particularly in open economies.
What is the capital account?
The capital account tracks financial flows such as foreign direct investment, portfolio investment, and loans between countries. It offsets the current account, ensuring that the balance of payments always balances to zero.
In AP Macroeconomics free response questions, the capital account helps explain how interest rates, investor confidence, and global financial conditions influence currency demand and supply. These ideas closely connect to the loanable funds market and financial sector, covered in AP Macroeconomics free response questions on the financial sector.
What is the exchange rate?
The exchange rate is the price of one currency in terms of another. Exchange rate systems may be floating, fixed, or managed, and changes in exchange rates influence exports, imports, capital flows, and inflation.
In AP Macroeconomics free response questions on trade and exchange rates, students are often asked to analyze how changes in interest rates, inflation, or economic growth affect currency values. These effects frequently overlap with GDP outcomes, making it useful to review AP Macroeconomics free response questions on GDP.
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
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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.