What is AP Macroeconomics?
AP Macroeconomics is a high school–level economics course that examines how economies function at the national level. Students study inflation, unemployment, economic growth, and stabilization policies, with a strong emphasis on how price changes affect output, employment, and living standards. The AP exam tests these concepts through a combination of multiple-choice questions and analytical free response questions (FRQs).
This page focuses specifically on AP Macroeconomics free response questions related to price level and inflation, which are among the most frequently tested topics on the exam.
Where did we get these AP Macroeconomics free response questions?
The AP Macroeconomics free response questions on price level and inflation compiled here are sourced from official College Board exams and closely aligned practice materials. Each question reflects the structure, scoring expectations, and analytical depth required on the AP exam.
To view all AP Macroeconomics free response questions across the full syllabus, visit the AP Macroeconomics hub page.
How to use these AP Macroeconomics free response questions
These AP Macroeconomics free response questions on inflation and price level should be used as timed exam practice. Students should clearly explain why the price level changes, identify whether inflationary or deflationary pressures exist, and trace the effects on real GDP, unemployment, and policy responses.
Because inflation questions often require monetary-policy analysis, students may benefit from reviewing AP Macroeconomics free response questions on monetary policy.
What is inflation?
Inflation is the sustained increase in the general price level of goods and services over time, resulting in a decline in the purchasing power of money. In AP Macroeconomics free response questions, inflation is commonly measured using indicators such as the Consumer Price Index (CPI) or the GDP deflator.
Moderate inflation is typical in a growing economy, but high inflation can reduce real incomes and distort economic decision-making, while deflation may signal weak demand and economic stagnation. Central banks attempt to manage inflation primarily through monetary policy.
What factors influence inflation?
Inflation in AP Macroeconomics free response questions is usually explained using one or more of the following mechanisms:
- Demand-pull inflation, when aggregate demand increases faster than productive capacity
- Cost-push inflation, caused by rising production costs such as wages or energy prices
- Monetary factors, including excessive growth in the money supply
- Expectations, where anticipated inflation influences wage and price setting
Understanding these drivers is essential for explaining inflation outcomes and policy responses in FRQs.
What is the price level?
The price level refers to the average level of prices in an economy at a given time, measured using indices such as the CPI or GDP deflator. In AP Macroeconomics free response questions, changes in the price level are used to evaluate inflationary and deflationary trends, real purchasing power, and macroeconomic stability.
Movements in the price level are closely linked to labor-market conditions. For additional context, students may also find it helpful to review AP Macroeconomics free response questions on employment and the workforce.
AP Macroeconomics Free Response Questions on Price Level and Inflation
Question 1
The table provided shows economic data for the country of Louland. The base year is year 1, and the GDP deflator in year 2 is 115.
(d) What was the numerical value of the inflation rate from year 1 to year 2 ?
(e) If nominal wages increased by 10% from year 1 to year 2, what happened to the real wages of workers in Louland during this time? Explain.
Question 2
The table provided shows the quantity and price of food and clothing, the only two goods produced and consumed in the country of Maltrose, in year 1 and year 2. Assume that year 1 is the base year.
(c) What was the numerical value of the inflation rate from year 1 to year 2 ?
(d) Assuming that the expected inflation rate between years 1 and 2 was 3%, were each of the following better off, worse off, or unaffected as a result of the economic conditions between year 1 and year 2 ?(i) People living on a fixed income (ii) Borrowers with fixed interest-rate loans. Explain.
Question 3
The economy of Noralandia is in short-run equilibrium with an actual inflation rate that is currently higher than the expected inflation rate.
(a) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium point as X.
(b) The banking system in Noralandia has ample reserves. Identify a specific monetary policy action that the central bank of Noralandia would take to bring the inflation rate closer to the expected inflation rate.
Question 4
The economy of Northland is in short-run equilibrium with an actual unemployment rate of 7% and an actual inflation rate of 1%. The natural unemployment rate in Northland is 5%.
(a) Using the relevant numerical values given, draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium point as X. Plot the relevant numerical values provided on the graph.
(b) Is the expected inflation rate greater than, less than, or equal to 1% ? Explain.
(c) Assume the marginal propensity to consume is 0.9. (i) If the government decreases income taxes by $20 billion, calculate the maximum change in aggregate demand. Show your work. (ii) If instead the government increases spending by $20 billion, calculate the maximum change in aggregate demand. Show your work.
(d) On your graph in part (a), show a possible new short-run equilibrium point labeled Z that would result if the government increases spending and there is no change in inflationary expectations.
(e) How would an increase in unemployment compensation affect aggregate demand in the short run? Explain.
(f) Assume instead the government takes none of the preceding policy actions. (Northland is still in short-run equilibrium; the actual unemployment rate is 7%, the actual inflation rate is 1%, and the natural unemployment rate is 5%.) What will happen to each of the following in the long run? (i) The short-run aggregate supply curve. Explain. (ii) The short-run Phillips curve (iii) The actual unemployment rate
Question 5
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 6
Assume the expected inflation rate in a country is 3%, the current unemployment rate is 6%, and the natural rate of unemployment is 4%.
(a) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium as point X and plot the numerical values above on the graph.
(b) Is the actual inflation rate greater than, less than, or equal to the expected inflation rate of 3%?
(c) Assume loans were made taking into account the expected inflation rate of 3%. Will lenders be better off or worse off after they realize the actual inflation rate identified in part (b) ? Explain.
(d) Based on the relationship between the actual and the expected inflation rates identified in part (a), what will happen to the natural rate of unemployment in the long run?
Question 7
Assume that an economy is in long-run equilibrium. Assume that consumers wish to hold less money because they use credit cards more frequently to purchase goods and services than cash.
(a) Draw a correctly labeled graph of the money market and show the effect of the reduced holdings of money on the equilibrium nominal interest rate in the short run.
(b) Based on the change in the interest rate in part (a), what will happen to each of the following in the short run? (i) Prices of previously issued bonds (ii) The price level and real income. Explain.
(c) With a constant money supply, based on your answer to part b(ii), will the velocity of money increase, decrease, or remain the same, or is the change indeterminate?
(d) If the central bank wishes to reverse the change in the interest rate identified in part (a), what open market operation would it use?
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.