What is AP Macroeconomics?
AP Macroeconomics is a high school–level economics course that examines how economies function at the national level. Students study GDP, unemployment, inflation, monetary and fiscal policy, and the role of the financial sector in allocating resources and supporting economic growth.
The AP exam assesses these ideas using multiple-choice questions and free response questions (FRQs) that require students to interpret economic diagrams, explain causal relationships, and evaluate policy outcomes.
Where did we get these AP Macroeconomics free response questions?
The AP Macroeconomics free response questions on the financial sector compiled on this page are drawn from official College Board exams and closely aligned practice materials. Each question reflects how the AP exam tests understanding of financial markets, interest rates, and capital allocation.
For a complete overview of all AP Macroeconomics free response questions by topic, visit the AP Macroeconomics hub page.
How to use these AP Macroeconomics free response questions
These AP Macroeconomics free response questions on the financial sector are best used as timed exam practice. Students should focus on accurately explaining interest rate changes, financial market interactions, and policy transmission mechanisms, while clearly labeling diagrams where required.
Because financial markets are closely connected to monetary policy, students may also benefit from practicing AP Macroeconomics free response questions on monetary policy.
What is the financial sector?
The financial sector consists of institutions and markets that facilitate the flow of funds between savers and borrowers. It includes commercial banks, central banks, bond markets, stock markets, and other financial intermediaries. By channeling savings into investment, the financial sector plays a central role in promoting economic growth and stability.
In AP Macroeconomics free response questions, the financial sector is often analyzed to explain investment behavior, interest rate movements, and the transmission of monetary policy.
What is the loanable funds market?
The loanable funds market illustrates how the real interest rate is determined by the interaction of saving and borrowing. The supply of loanable funds comes from households and firms that save, while demand comes from businesses and governments seeking funds for investment and spending.
Changes in fiscal policy, monetary policy, or economic growth can shift supply or demand in the loanable funds market, affecting interest rates and investment levels. Because these changes influence overall output, students may also find it useful to review AP Macroeconomics free response questions on GDP.
AP Macroeconomics Free Response Questions on The Financial Sector
Question 1
Assume a country’s economy is operating below full employment.
(a) Draw a correctly labeled graph of aggregate demand, short-run aggregate supply, and long-run aggregate supply, and show each of the following. (i) The current equilibrium real output and price level, labeled as Y1 and PL1, respectively (ii) The full-employment output, labeled as YF
(b) Identify one fiscal policy action the country’s government can take to restore full employment.
(c) Assume instead that no fiscal policy action is taken. Suppose a change in investment spending causes real GDP to increase by $ 200 billion. Calculate the minimum change in investment spending that could have caused this increase in real GDP if the marginal propensity to save is 0.25. Show your work.
(d) Assume the output gap was initially $ 800 billion. On your graph in part (a), show the short-run effect of the change in investment spending identified in part (c), labeling the new equilibrium real output as Y2 and the new equilibrium price level as PL2.
(e) Given your answer to part (d), is the actual rate of unemployment greater than, less than, or equal to the natural rate of unemployment? Explain.
(f) Assume that private savings now increase. Draw a correctly labeled graph of the loanable funds market and show the effect of the increase in private savings on the real interest rate.
(g) Based solely on the change in the real interest rate shown in part (f), what will happen to each of the following? (i) Real GDP in the short run. Explain. (ii) Long-run aggregate supply. Explain.
Question 2
Assume that commercial banks must hold a minimum of 20% of their deposits as reserves. Now suppose that the central bank of the country sells $100,000 of government bonds to commercial banks.
(a) Calculate the maximum change and state the direction of change in the money supply as a result of the central bank bond sale. Show your work.
(b) Draw a correctly labeled graph of the money market and show the effect of the change in the money supply identified in part (a) on the nominal interest rate.
(c) Given the change in the money supply in part (a), if the velocity of money is constant, what will happen to the nominal gross domestic product? Explain.
(d) Based on the change in the nominal gross domestic product in part (c), what happens to the price level if the real gross domestic product is constant?
Question 3
The economy of Country Zeta is in long-run equilibrium; however, the government is concerned about the size of the national debt.
(a) Identify one specific fiscal policy action the government could take to reduce the national debt.
(b) Draw a correctly labeled graph of the loanable funds market, and show the effect of the fiscal policy action identified in part (a) on the real interest rate.
(c) Based on the change in the real interest rate identified in part (b), what will happen to each of the following? (i) Aggregate demand in the short run. Explain. (ii) Potential real output. Explain.
Question 4
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 5
Assume the economy of Artland is currently operating above full employment.
(a) Draw a correctly labeled graph of the short-run aggregate supply, long-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) The full-employment output, labeled as Yf
(b) Assume the central bank and the government do not take any policy actions to close the output gap. (i) On your graph in part (a), show how the economy automatically adjusts in the long run and label the new equilibrium price level PL2. (ii) Explain the cause of the adjustment shown in part (b)(i).
(c) Alternatively, suppose the government wants to close the output gap using fiscal policy. (i) Identify a fiscal policy action the government could implement to close the output gap. (ii) How will the fiscal policy action identified in part (c)(i) affect the following? – The unemployment rate – The natural rate of unemployment (iii) In closing the output gap, will the automatic adjustment identified in part (b)(i) produce a higher, a lower, or the same price level compared to the fiscal policy identified in part (c)(i) ?
(d) Draw a correctly labeled graph of the market for loanable funds. Show the effect of the fiscal policy action identified in part (c)(i) on the equilibrium real interest rate.
(e) Given the interest rate change identified in part (d), will the long-run aggregate supply curve shift to the right, shift to the left, or remain the same in the long run? Explain.
Question 6
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?
Question 7
A country is at full employment and produces two types of goods: consumer goods and capital goods.
(a) Draw a correctly labeled graph of the production possibilities curve, with consumer goods on the horizontal axis and capital goods on the vertical axis. Indicate a point on your graph, labeled X, that represents full employment and a possible combination in which both goods are being produced.
(b) Assume there is an increase in the country’s national savings. Draw a correctly labeled graph of the loanable funds market, showing the change in the real interest rate from the increase in savings.
(c) On the same graph from part (a), show another point, labeled Z, that represents full employment and a new combination of consumer goods and capital goods consistent with the increase in the country’s national savings.
(d) Referring to your answer to part (c), will the long-run aggregate supply curve shift to the right, shift to the left, or remain the same? Explain.
Question 8
The following is the balance sheet of First Superior Bank.
(a) What is the dollar value of new loans that First Superior Bank can make? Explain.
(b) Mr. Smith deposits $100 of cash in a demand deposit account in First Superior Bank. Calculate the maximum amount of new loans that First Superior Bank can now make.
(c) As a result of Mr. Smith’s $100 cash deposit, calculate the maximum change over time in each of the following in the banking system. (i) Loans (ii) Demand deposits
(d) As a result of Mr. Smith’s $100 cash deposit, calculate the maximum change over time in the money supply.
(e) Provide one reason why the actual change in money supply can be smaller than the maximum change you identified in part (d).
Answer Key
Question 1
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Question 8
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.