MacroIQ · AP Macroeconomics

MacroIQ Mock Exam 2 — Full AP Simulation (All Units)

Coverage: Units 1–6, Lessons 1–15, at CED weightings Format: Full-length AP Macroeconomics exam. Take it in one sitting under real timing.

Section	Questions	Time	Weight
I: Multiple choice	60 (5 choices)	70 minutes	66%
II: Free response	1 long + 2 short	60 minutes	33%

Scoring worksheet (end of key): MC 1 pt each (60) + FRQ points × 1.5 (30) → composite out of 90. Calibration (approximate): 66+ ≈ 5 · 53–65 ≈ 4 · 40–52 ≈ 3.

SECTION I: Multiple Choice (70 minutes)

Question 1

The economy of Andor produces at a point inside its production possibilities curve. Andor can move to the curve by:

(A) improving technology
(B) acquiring more capital
(C) employing its idle resources more fully
(D) shifting the curve outward
(E) raising the price level

Question 2

In the circular flow model, injections into the spending stream include:

(A) investment, government purchases, and exports
(B) saving, taxes, and imports
(C) wages, rent, and interest
(D) consumption only
(E) transfer payments and taxes

Question 3

A government builds a dam instead of its next-best option, a highway valued at $70 million (a hospital worth $55 million was also considered). The opportunity cost of the dam is:

(A) $125 million
(B) $55 million
(C) the dam's construction cost
(D) zero, since the projects differ
(E) the $70 million highway

Question 4

Which of the following counts in this year's GDP?

(A) the resale of a 15-year-old house
(B) a haircut purchased at a barbershop this year
(C) a stimulus check received by a household
(D) a purchase of shares in a mutual fund
(E) steel sold to an automaker for use in new cars

Question 5

Nominal GDP rises from $20T to $22T while the GDP deflator rises from 100 to 110. Real GDP:

(A) rose 10%
(B) fell 10%
(C) rose to $21T
(D) was unchanged at $20T
(E) cannot be computed

Question 6

A steelworker permanently loses his job to a robotic production line and lacks the skills local employers need. His unemployment is:

(A) frictional
(B) cyclical
(C) seasonal
(D) natural
(E) structural

Question 7

Adult population 220M; labor force 140M; employed 126M. The unemployment rate is:

(A) 6.4%
(B) 10%
(C) 11.1%
(D) 63.6%
(E) 90%

Question 8

The natural rate of unemployment consists of:

(A) cyclical plus structural unemployment
(B) all unemployment during a recession
(C) zero unemployment
(D) frictional plus structural unemployment
(E) frictional plus cyclical unemployment

Question 9

The CPI rises from 160 to 168. The inflation rate over the period is:

(A) 5%
(B) 8%
(C) 4.8%
(D) 1.05%
(E) 68%

Question 10

A lender charges 9% nominal interest expecting 4% inflation; actual inflation turns out to be 8%. The lender's realized real return is:

(A) 5%
(B) 4%
(C) 1%
(D) 17%
(E) −1%

Question 11

Unanticipated deflation would most benefit:

(A) lenders holding fixed-rate loans, who are repaid in dollars worth more than expected
(B) borrowers with fixed-rate mortgages
(C) firms with unsold inventory
(D) workers who just accepted wage cuts
(E) the government servicing fixed-rate debt

Question 12

In the equation of exchange, M = $3T, V = 4, and real output = 6T units. The price level is:

(A) 8
(B) 0.5
(C) 4.5
(D) 2
(E) 12

Question 13

Which is a reason the AD curve slopes downward?

(A) the substitution effect between individual goods
(B) rising input costs at higher output
(C) a lower price level makes domestic goods relatively cheaper to foreigners, raising net exports
(D) sticky wages in the short run
(E) diminishing marginal returns

Question 14

Which event shifts aggregate demand to the LEFT?

(A) a cut in personal income taxes
(B) rising consumer confidence
(C) currency depreciation
(D) increased government purchases
(E) a collapse in household wealth as home prices fall

Question 15

A rise in inflation expectations among workers and firms shifts:

(A) AD rightward
(B) SRAS leftward, as wage demands raise production costs
(C) LRAS leftward
(D) AD leftward
(E) SRAS rightward

Question 16

Stagflation is the combination of:

(A) falling prices and falling output
(B) rising price level and falling real output
(C) rising output and stable prices
(D) falling unemployment and rising inflation
(E) rising output and falling inflation

Question 17

An economy operates where AD and SRAS intersect to the RIGHT of LRAS. Its unemployment rate is:

(A) above the natural rate
(B) equal to the natural rate
(C) rising rapidly
(D) equal to zero
(E) below the natural rate

Question 18

With no policy action, an economy in an inflationary gap returns to long-run equilibrium when:

(A) nominal wages rise, shifting SRAS leftward until output returns to potential
(B) aggregate demand falls automatically
(C) LRAS shifts right to meet AD
(D) the price level falls to its original level
(E) the natural rate of unemployment rises

Question 19

The MPC is 0.9. The maximum spending multiplier and tax multiplier (absolute values) are:

(A) 9 and 10
(B) 10 and 10
(C) 10 and 9
(D) 0.9 and 0.1
(E) 5 and 4

Question 20

An economy has a recessionary gap of $120 billion in real GDP and an MPC of 0.75. The minimum increase in government purchases to close the gap is:

(A) $120 billion
(B) $90 billion
(C) $40 billion
(D) $30 billion
(E) $480 billion

Question 21

Which is an example of an automatic stabilizer at work?

(A) Congress passes an emergency infrastructure bill
(B) the central bank cuts interest rates in a recession
(C) a new law raises marginal tax rates
(D) income tax collections fall automatically as incomes fall in a recession
(E) the treasury issues more bonds

Question 22

Contractionary fiscal policy in an inflationary gap involves:

(A) buying government securities
(B) raising transfer payments
(C) reducing government purchases and/or raising taxes, shifting AD left
(D) lowering the reserve requirement
(E) raising the interest rate on reserve balances

Question 23

The balanced-budget multiplier implies that equal increases in government purchases and taxes will:

(A) leave real GDP unchanged
(B) raise real GDP by the amount of the spending increase
(C) lower real GDP
(D) raise real GDP by the spending multiplier times the change
(E) eliminate the deficit

Question 24

Which of the following is included in M1?

(A) a 6-month certificate of deposit
(B) corporate stock
(C) an unused line of credit
(D) Treasury bills
(E) checkable deposits and currency held by the public

Question 25

The reserve requirement is 10%. A bank receives a new $2,000 deposit. Its required reserves on that deposit and maximum new single-bank loan are:

(A) $200 and $1,800
(B) $1,800 and $200
(C) $200 and $20,000
(D) $2,000 and $0
(E) $20 and $1,980

Question 26

With a reserve requirement of 10%, the Fed buys $50 million of securities from banks. The maximum increase in the money supply is:

(A) $500 million
(B) $50 million
(C) $45 million
(D) $5 million
(E) $450 million

Question 27

In the money market, an increase in real GDP (with money supply fixed) causes:

(A) the money supply to shift right
(B) a movement down the money demand curve
(C) money demand to shift left, lowering the interest rate
(D) no change in the interest rate
(E) money demand to shift right, raising the nominal interest rate

Question 28

To combat a recession under limited reserves, the Fed's standard open-market action and its interest-rate effect are:

(A) sell bonds; rates rise
(B) sell bonds; rates fall
(C) buy bonds; the nominal interest rate falls
(D) buy bonds; rates rise
(E) hold bonds; rates are unchanged

Question 29

Under ample reserves, the Fed tightens policy primarily by:

(A) large purchases of bonds
(B) lowering the discount rate
(C) eliminating the reserve requirement
(D) raising administered rates, especially interest on reserve balances
(E) instructing Congress to raise taxes

Question 30

The transmission mechanism of expansionary monetary policy runs:

(A) MS↑ → nominal rate ↑ → I↓ → AD left
(B) MS↑ → nominal rate ↓ → I↑ → AD right → real GDP and price level rise
(C) G↑ → AD right → output rises
(D) MS↓ → rate ↓ → I↑ → AD right
(E) taxes↓ → C↑ → AD right

Question 31

In the loanable funds market, the supply curve slopes upward because:

(A) the central bank fixes the quantity of funds
(B) borrowers seek more funds at higher rates
(C) higher real interest rates induce more saving
(D) inflation rises with interest rates
(E) investment falls as rates rise

Question 32

A government moves from surplus to large deficit. In the loanable funds market:

(A) supply shifts right and the real rate falls
(B) demand shifts right and the real interest rate rises
(C) demand shifts left and the rate falls
(D) the supply curve becomes vertical
(E) nothing happens without Fed approval

Question 33

The crowding-out effect of the deficit in question 32 operates through:

(A) lower taxes stimulating consumption
(B) automatic stabilizers
(C) exchange-rate depreciation
(D) the higher real interest rate reducing private investment spending
(E) an increase in the money supply

Question 34

Which correctly pairs each market with the interest rate it determines?

(A) money market → nominal rate; loanable funds market → real rate
(B) money market → real rate; loanable funds → nominal rate
(C) both → nominal rate
(D) both → real rate
(E) money market → federal funds rate; loanable funds → discount rate

Question 35

An increase in national saving shifts the supply of loanable funds right. The result is:

(A) higher real rates and less investment
(B) no change in investment
(C) higher nominal rates only
(D) less capital accumulation
(E) a lower real interest rate and increased investment — crowding in

Question 36

The short-run Phillips curve shows that, holding expectations constant, a decrease in aggregate demand produces:

(A) lower inflation and lower unemployment
(B) higher inflation and higher unemployment
(C) a shift of the SRPC to the right
(D) a shift of the SRPC to the left
(E) a movement along the SRPC to higher unemployment and lower inflation

Question 37

An adverse supply shock (SRAS shifts left) appears on the Phillips curve diagram as:

(A) a movement up the SRPC
(B) a movement down the SRPC
(C) a leftward shift of the SRPC
(D) a rightward (upward) shift of the SRPC
(E) a flattening of the LRPC

Question 38

The long-run Phillips curve is:

(A) vertical at the natural rate of unemployment
(B) downward-sloping like the SRPC
(C) horizontal at the target inflation rate
(D) upward-sloping
(E) undefined

Question 39

An economy at its natural rate receives a monetary stimulus. In the LONG RUN, the result is:

(A) permanently lower unemployment
(B) unemployment back at the natural rate with permanently higher inflation
(C) permanently higher real GDP
(D) lower inflation
(E) a leftward shift of the LRPC

Question 40

Under rational expectations with full central-bank credibility, an ANNOUNCED disinflation program could:

(A) never reduce inflation
(B) reduce inflation only by raising unemployment for a decade
(C) reduce inflation with a smaller rise in unemployment, because expectations (and the SRPC) adjust quickly
(D) shift the LRPC leftward
(E) raise the natural rate of unemployment

Question 41

Economic growth is shown on the AD-AS diagram as:

(A) AD shifting right along SRAS
(B) LRAS shifting rightward (with SRAS), raising potential output
(C) a movement along LRAS
(D) the price level rising over time
(E) SRAS shifting left

Question 42

Output per worker rises when:

(A) physical capital per worker, human capital, or technology improves
(B) the money supply grows faster
(C) the price level rises
(D) transfer payments increase
(E) the currency appreciates

Question 43

Repeatedly adding identical machines to a fixed workforce yields progressively smaller output gains. This is:

(A) crowding out
(B) the multiplier effect
(C) economies of scale
(D) money neutrality
(E) diminishing returns to physical capital

Question 44

Which policy is most directly aimed at raising LONG-RUN growth?

(A) a one-time consumer rebate
(B) an increase in unemployment benefits
(C) permanent tax incentives for saving, investment, and R&D
(D) a price floor on agricultural goods
(E) contractionary monetary policy

Question 45

Real GDP grows 5% while population grows 2%. Real GDP per capita grows approximately:

(A) 7%
(B) 2.5%
(C) 5%
(D) 3%
(E) 10%

Question 46

Persistent crowding out of private investment most directly threatens:

(A) the current inflation rate
(B) short-run consumption
(C) the money multiplier
(D) the growth rate of potential output, via slower capital accumulation
(E) the natural rate of unemployment

Question 47

A U.S. firm receives dividend income from its factory in Brazil. In the U.S. balance of payments, this is recorded in the:

(A) capital and financial account as an outflow
(B) trade balance as an export of goods
(C) financial account as a bond purchase
(D) balance of trade as an import
(E) current account as income received from abroad

Question 48

A country runs a current account surplus. Its capital and financial account must be:

(A) also in surplus
(B) in deficit — the country is a net purchaser of foreign assets
(C) exactly zero
(D) larger than the current account
(E) unrelated to the current account

Question 49

In the FOREX market for the Mexican peso, the supply of pesos comes from:

(A) foreigners buying Mexican exports
(B) foreign investors buying Mexican bonds
(C) Mexican residents buying imports and foreign assets
(D) the Bank of Mexico's reserve requirement
(E) U.S. consumers buying Mexican goods

Question 50

Interest rates in Canada rise relative to those in the U.S. In the market for the Canadian dollar:

(A) demand shifts right and the Canadian dollar appreciates
(B) demand shifts left and it depreciates
(C) supply shifts right and it depreciates
(D) both curves shift left
(E) the exchange rate is unaffected

Question 51

As the Canadian dollar appreciates (question 50), Canada's net exports and aggregate demand:

(A) both decline
(B) both increase
(C) net exports rise while AD falls
(D) are unaffected
(E) net exports fall while AD rises

Question 52

Which combination is most likely to cause a currency to DEPRECIATE?

(A) relatively high domestic interest rates and low inflation
(B) booming foreign demand for the country's exports
(C) relatively low domestic interest rates and relatively high domestic inflation
(D) foreign purchases of domestic real estate
(E) expectations of future appreciation

Question 53

A tariff on imported solar panels most likely:

(A) lowers the domestic price of panels
(B) benefits foreign producers
(C) increases total gains from trade
(D) raises the domestic price, protecting domestic producers at consumers' expense
(E) has no effect on domestic industries that install panels

Question 54

U.S. income growth accelerates while its trading partners stagnate. The U.S. current account balance will most likely:

(A) move toward surplus as exports boom
(B) be unaffected
(C) improve because of capital inflows
(D) move toward surplus as imports fall
(E) move toward deficit as import growth outpaces export growth

Question 55

An economy at full employment experiences a large inflow of foreign capital. In the loanable funds market, this causes:

(A) demand to shift right, raising the real rate
(B) the supply of loanable funds to shift right, lowering the real interest rate and raising investment
(C) supply to shift left, raising rates
(D) no change
(E) the demand curve to become vertical

Question 56

The Fed unexpectedly and aggressively eases policy while the economy is already at full employment. The SHORT-RUN Phillips-curve representation is:

(A) a rightward shift of the SRPC
(B) a movement up-left along the SRPC to unemployment below the natural rate and higher inflation
(C) a movement down-right along the SRPC
(D) a leftward shift of the LRPC
(E) no movement — money is neutral

Question 57

Following question 56, as inflation expectations adjust, the economy transitions to:

(A) the original inflation rate at lower unemployment
(B) permanently lower unemployment
(C) deflation
(D) the natural rate of unemployment at a higher inflation rate, as the SRPC shifts up
(E) a flatter SRPC

Question 58

Combining fiscal deficits with their international effects: larger deficits raise real interest rates, which:

(A) depreciate the currency and raise net exports
(B) have no exchange-rate consequences
(C) attract foreign capital, appreciate the currency, and reduce net exports
(D) reduce foreign purchases of domestic bonds
(E) automatically balance the budget

Question 59

Which sequence best describes expansionary monetary policy's effect through the FOREX market?

(A) rates fall → capital outflow → currency depreciates → net exports rise → AD reinforced rightward
(B) rates fall → capital inflow → appreciation → exports rise
(C) rates rise → depreciation → imports rise
(D) rates fall → currency appreciates → net exports fall
(E) money growth → LRAS shifts right

Question 60

An economy shows: unemployment above the natural rate, low inflation, and a government proposing simultaneous spending increases and central-bank bond purchases. The predicted short-run result of both policies together is:

(A) lower output and higher unemployment
(B) higher interest rates with no output change
(C) a leftward shift of AD
(D) offsetting effects that cancel exactly
(E) a strong rightward shift of AD, raising output and the price level, with the bond purchases moderating any crowding out

SECTION II: Free Response (60 minutes)

FRQ 1 (Long — ~25 minutes)

The economy of Caldora is operating at full employment when a surge in consumer and business optimism sharply increases spending.

(a) Draw a correctly labeled AD–SRAS–LRAS graph showing Caldora's initial full-employment equilibrium (PL₁, Yf) and the effect of the optimism surge. Label the new short-run equilibrium PL₂ and Y₂.

(b) Identify the type of output gap Caldora now has, and state whether its unemployment rate is above, below, or equal to the natural rate.

(c) Draw a correctly labeled short-run and long-run Phillips curve graph for Caldora. Label the initial position (point A, on both curves) and Caldora's new short-run position (point B).

(d) Caldora's central bank decides to close the gap with monetary policy under a limited-reserves framework. (i) Identify the appropriate open-market operation. (ii) Using a correctly labeled money market graph, show the effect of this operation on the nominal interest rate. (iii) Explain how the interest-rate change affects aggregate demand, naming the component involved.

(e) Suppose instead the central bank does nothing. Explain the adjustment process that returns Caldora to long-run equilibrium, and state what happens to the price level compared with PL₂.

FRQ 2 (Short — ~12.5 minutes)

The government of Tessia, currently running a balanced budget, enacts a permanent increase in spending financed entirely by borrowing. Tessia's economy is at full employment.

(a) Draw a correctly labeled graph of Tessia's loanable funds market showing the effect of the government's borrowing. Label the initial and new real interest rates r₁ and r₂.

(b) Explain how the change in the real interest rate affects private investment. What is this effect called?

(c) Assume Tessia is open to international capital flows. Explain how the change in Tessia's real interest rate affects: (i) international capital flows into Tessia (ii) the international value of Tessia's currency

(d) Given your answer to (c)(ii), what happens to Tessia's net exports?

FRQ 3 (Short — ~12.5 minutes)

The nation of Veyra uses the ven; its trading partner Orlin uses the oril. Interest rates are initially equal in both countries. Then Orlin's central bank raises its policy rate substantially; Veyra's rates are unchanged.

(a) Draw a correctly labeled graph of the foreign exchange market for the VEN (priced in orils per ven), showing the initial equilibrium e₁.

(b) Show the effect of Orlin's interest-rate increase on your graph, shifting ONE curve, and label the new equilibrium e₂. Explain the shift.

(d) Explain the effect of this change on Veyra's net exports and real GDP in the short run.

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Show answer key & explanations

ANSWER KEY & EXPLANATIONS

Section I

1. C. Inside the curve = idle resources; using them reaches the frontier. A/B/D: those shift the curve — more than needed. E: prices don't move production points. Fix: Inside → curve = recovery; curve moves = growth.

2. A. Injections = I, G, X. B: those are the leakages. C: factor payments. D/E: consumption is the stream itself; transfers/taxes aren't injections. Fix: Memorize the triplets: injections I-G-X, leakages S-T-M.

3. E. Opportunity cost = the single next-best alternative. A: don't sum alternatives. B: hospital wasn't next-best. C: expenditure ≠ opportunity cost. D: scarcity guarantees a cost. Fix: One forgone next-best option — that's the cost.

4. B. A haircut is a final service produced this year. A: used asset. C: transfer. D: financial transaction. E: intermediate good — counted inside the car's value. Fix: Final + produced this year + within borders.

5. D. Real = 22/1.10 = $20T — unchanged. A: that's the nominal rise. B: no fall. C: wrong arithmetic. E: fully computable. Fix: Deflate nominal before declaring growth.

6. E. Permanent skills mismatch from automation = structural. A: not search-related. B: no downturn. C: no season. D: "natural" is a sum, not a type. Fix: Skills obsolete/industry gone = structural.

7. B. Unemployed = 140 − 126 = 14; 14/140 = 10%. A: 14/220. C: 14/126. D/E: participation-style ratios. Fix: Denominator = labor force.

8. D. NRU = frictional + structural. A/E: cyclical is never in it. B: recessions add cyclical. C: zero isn't natural. Fix: Natural = the unemployment that survives full employment.

9. A. (168 − 160)/160 = 8/160 = 5%. B: uses index points. C: divides by 168. D/E: misreads. Fix: Divide the change by the STARTING index.

10. C. Realized real = 9 − 8 = 1%. A: uses expected inflation. B: that's expected inflation itself. D: added. E: subtraction slip. Fix: Realized real = nominal − ACTUAL inflation.

11. A. Deflation strengthens repaid dollars — lenders win; borrowers lose. B/E: debtors are hurt by deflation. C: inventory loses value. D: wage-cut workers aren't beneficiaries. Fix: Deflation reverses the inflation table: fixed-payment receivers win.

12. D. P = MV/Y = 12/6 = 2. A: forgot to divide. B: inverted. C/E: arithmetic slips. Fix: Rearrange MV = PY before plugging in.

13. C. The exchange-rate effect: lower PL → relatively cheap domestic goods → Xn↑. A: micro logic, invalid here. B/D: supply-side stories. E: unrelated. Fix: Wealth, interest-rate, exchange-rate — the only three slope reasons.

14. E. Falling wealth cuts consumption at every PL → AD left. A/B/C/D: each raises C, C, Xn, or G → right. Fix: Sign each event through its component before shifting.

15. B. Expected inflation → higher wage demands → costs up → SRAS left. A/D: expectations of inflation aren't a spending shifter here. C: LRAS ignores nominal expectations. E: backwards. Fix: Inflation expectations are a cost shifter — SRAS left when they rise.

16. B. Stagflation = inflation + falling output (rising unemployment). A: deflationary slump. C/E: benign outcomes. D: that's a hot economy. Fix: "Stag" (stagnation) + "flation" (inflation) — both bad, at once.

17. E. Right of LRAS = inflationary gap = below-natural unemployment. A: that's the recessionary side. B: on LRAS only. C/D: not implied. Fix: Output above potential ↔ unemployment below natural.

18. A. Tight labor markets bid wages up → SRAS left → output back to Yf at a higher price level. B: AD stays put without policy. C: LRAS doesn't chase. D: the PL ends higher. E: the NRU is fixed here. Fix: Self-correction = wages adjust → SRAS moves; that's the whole mechanism.

19. C. Spending: 1/0.1 = 10. Tax: 0.9/0.1 = 9. A: swapped. B: taxes are weaker. D: raw propensities. E: uses MPC 0.8. Fix: Tax multiplier magnitude = spending multiplier − 1.

20. D. Multiplier = 1/0.25 = 4; ΔG = 120/4 = $30B. A: no multiplier. B: multiplied by MPC. C: used multiplier 3. E: multiplied instead of divided. Fix: Required ΔG = gap ÷ multiplier.

21. D. Progressive taxes shrink automatically in recessions — no action needed. A/C/E: discretionary/legislative. B: monetary policy. Fix: Automatic = built into existing law.

22. C. Fiscal cooling = cut G / raise T → AD left. A/D/E: monetary tools. B: expansionary. Fix: Match the institution (Congress) and the direction (contract).

23. B. Balanced-budget multiplier = 1: ΔGDP = ΔG. A/C: ignores the multiplier asymmetry. D: overstates. E: the budget change is zero by construction, but GDP still rises. Fix: Equal G and T changes still stimulate — by exactly the initial change.

24. E. M1 = currency + checkable deposits (plus savings deposits in the current definition). A: M2. B/D: securities. C: credit isn't money. Fix: Spendable-today assets = M1.

25. A. Required = 10% × 2,000 = $200; single-bank loan = $1,800. B: swapped. C: system-level confusion. D: banks lend excess. E: decimal error. Fix: One bank lends its excess reserves — deposit minus required.

26. A. Multiplier = 10; 10 × 50M = $500M (full multiplier — reserves injected). B: no multiplication. C/E: subtracted required reserves unnecessarily. D: divided. Fix: Fed injections get the full 1/rr multiplier.

27. E. More transactions → more money demanded at every rate → MD right → rate rises. A: supply is Fed-set. B: that's a response to a rate change. C: backwards. D: the rate must rise to re-ration fixed money. Fix: MD shifts with real GDP and the price level.

28. C. Buy bonds → reserves and MS up → nominal rate falls. A/B/D: wrong action or direction. E: passivity isn't policy. Fix: Buy = bigger MS = lower rates. Recession → buy.

29. D. Ample reserves → administered rates (IORB up = tighten). A/B: easing actions. C: removing requirements eases if anything. E: that's fiscal. Fix: Modern tightening = raise IORB and administered rates.

30. B. The four-link chain in the right order and directions. A: contraction chain mislabeled. C/E: fiscal chains. D: internally contradictory. Fix: MS → i → I → AD → (Y, PL). Narrate every link.

31. C. Higher real returns reward postponing consumption → more saving supplied. A: that's the money market. B: describes demand. D/E: not the supply logic. Fix: Loanable-funds supply = saving, upward in r.

32. B. Deficits add government borrowing → D_LF right → r up. A/C: wrong curve/direction. D: no vertical curves here. E: no Fed gatekeeping. Fix: AP convention: deficits shift loanable-funds DEMAND right.

33. D. The rate is the mechanism: costlier financing → fewer private projects. A/B: fiscal features, not crowding out. C: the exchange rate moves the other way (appreciation). E: deficits don't print money. Fix: Crowding out = deficit → r↑ → I↓ — three beats, always.

34. A. Money market prices liquidity (nominal); loanable funds prices patience (real). B/C/D: at least one mismatch. E: those are specific policy/administered rates, not the market variables. Fix: Nominal for money, real for funds — the Unit 4 axis law.

35. E. Supply right → r down → investment up: crowding in. A: backwards. B: investment responds to r. C: real market, real rate. D: MORE capital accumulation. Fix: More saving = cheaper funds = more investment.

36. E. AD down = slide down-right along SRPC: UE up, inflation down. A/B: can't move both the same way along the curve. C/D: demand events never shift the SRPC. Fix: Demand shocks slide; supply shocks shift.

37. D. SRAS left ↔ SRPC right/up — worse inflation at every unemployment rate. A/B: movements are demand stories. C: that's the positive shock. E: the LRPC doesn't flatten. Fix: The AD-AS ↔ Phillips mirror: SRAS left = SRPC right.

38. A. Vertical at the NRU — no long-run tradeoff. B: that's the short-run curve. C/D/E: no. Fix: LRPC = LRAS's twin: vertical, real-side determined.

39. B. Expectations catch up → SRPC shifts up → back to NRU at higher inflation. A/C: no permanent real gains. D: inflation rises. E: LRPC ignores policy. Fix: Stimulus at full employment: temporary jobs, permanent inflation.

40. C. Credible announcements move expectations directly → the SRPC drops without a long slump. A: disinflation always possible. B: that's the adaptive worst case. D: the NRU is untouched. E: no. Fix: Credibility cheapens disinflation by moving expectations first.

41. B. Growth = potential output rising = LRAS (with SRAS) right. A: demand, temporary. C: can't slide along a vertical line to new output. D: that's inflation. E: cost shock. Fix: If potential changed, the vertical line must move.

42. A. The production-function trio: physical capital, human capital, technology. B/C: nominal, no capacity effect. D/E: redistribution and currency values don't raise productivity. Fix: Productivity runs on capital, skills, and ideas.

43. E. Fixed labor + more identical capital → smaller gains each round: diminishing returns. A/B/D: different concepts. C: scale economies describe costs, and inputs here aren't scaling together. Fix: Capital alone tires; technology refreshes the payoff.

44. C. Permanent saving/investment/R&D incentives build capital and ideas → LRAS growth. A/B: demand-side cushions. D: price floors distort. E: inflation control, not growth. Fix: Growth policy = capacity policy, not spending policy.

45. D. 5 − 2 = 3% per capita. A: added. B: halved. C: ignored population. E: doubled. Fix: Per-capita ≈ output growth − population growth.

46. D. Less investment now = slower capital accumulation = slower LRAS march. A/B/C/E: not the channel. Fix: Crowding out is a growth tax paid in future potential output.

47. E. Cross-border investment income sits in the current account. A/C: asset purchases go to the financial account — income from them doesn't. B/D: no goods moved. Fix: Current account = goods, services, income, transfers.

48. B. CA + CFA = 0: surplus in one = deficit in the other; the surplus country accumulates foreign assets. A/C/D: violate the identity. E: they're linked by construction. Fix: Trade surplus ⇒ net lender/asset-buyer abroad.

49. C. Peso supply = Mexicans exchanging pesos for foreign currency (imports, foreign assets). A/B/E: those are peso demand. D: not a FOREX actor in this model. Fix: A currency is supplied by its own residents buying foreign things.

50. A. Higher Canadian returns attract foreign capital → demand for C$ right → appreciation. B/C: backwards. D/E: no. Fix: Relatively higher rates → inflow → appreciation.

51. A. Appreciation prices exports out and imports in: Xn falls → AD falls. B/C/E: contradict the mechanism. D: Xn is in AD. Fix: Strong currency, weak net exports.

52. C. Low relative returns push capital out; high relative inflation prices goods out — both weaken the currency. A/B/D/E: each strengthens it. Fix: Depreciation drivers: low relative rates, high relative inflation, weak export demand.

53. D. Tariffs raise the protected good's domestic price: producers gain, consumers and users pay, efficiency falls. A/B/C/E: contradict tariff mechanics. Fix: Tariff = consumer-to-producer transfer plus deadweight loss.

54. E. Fast domestic income growth sucks in imports while stagnant partners buy few exports → CA toward deficit. A/D: backwards. B: incomes are a prime CA driver. C: capital inflows are the mirror, not the improvement. Fix: Grow faster than your partners → trade balance worsens (imports outpace exports).

55. B. Foreign capital adds to domestic saving supply → S_LF right → r down, I up. A/C: wrong curve/direction. D/E: no. Fix: Capital inflows = extra loanable-funds supply.

56. B. Unexpected easing at full employment: slide up-left along the SRPC (UE below natural, inflation up). A: shifts come later via expectations. C: wrong direction. D: never from policy. E: money is neutral only in the long run. Fix: Surprise demand policy slides along the SRPC first.

57. D. Expectations adjust → SRPC up → back to the NRU at higher inflation. A/B: no free lunch survives. C: inflation ratchets up, not down. E: slope isn't the story. Fix: The three-beat cycle: slide, shift, return.

58. C. Higher r pulls in foreign capital → appreciation → Xn falls (international crowding out). A/D: backwards. B: rates are FOREX's prime mover. E: no. Fix: Deficits → r↑ → inflow → appreciation → Xn↓.

59. A. Easing lowers relative returns → capital leaves → depreciation → Xn up → AD gets a second push. B/D: appreciation is the tightening direction. C: contradictory. E: money doesn't move LRAS. Fix: The exchange rate is monetary policy's amplifier: easing depreciates, tightening appreciates.

60. E. Expansionary fiscal + expansionary monetary → AD strongly right; bond purchases hold rates down, muting crowding out. A/C: wrong direction. B: rates are being suppressed. D: the tools reinforce, not cancel. Fix: Coordinated stimulus stacks; monetary accommodation offsets fiscal crowding out.

Section II

FRQ 1 rubric (10 points)

(a) 2 pts: Three-curve graph, initial equilibrium on LRAS at (PL₁, Yf) (1); AD shifts right → Y₂ > Yf, PL₂ > PL₁ labeled (1).
(b) 1 pt: Inflationary gap; unemployment below the natural rate.
(c) 2 pts: Phillips graph with downward SRPC and vertical LRPC at the NRU; point A at their intersection (1); point B up-left along the SRPC (lower UE, higher inflation) (1).
(d) 3 pts: (i) Sell government securities (1). (ii) Money market with vertical MS shifting left → nominal rate rises from i₁ to i₂ (1). (iii) Higher rates raise borrowing costs → investment (and interest-sensitive consumption) falls → AD shifts left, closing the gap (1).
(e) 2 pts: With unemployment below the natural rate, nominal wages rise → SRAS shifts left until output returns to Yf (1); the price level rises further above PL₂ (1).

FRQ 2 rubric (5 points)

(a) 2 pts: Loanable funds graph, real interest rate on y-axis (1); government borrowing shifts D_LF right → r₂ > r₁ (1).
(b) 1 pt: Higher real rates make capital projects costlier to finance → private investment falls — crowding out.
(c) 1 pt: (i) Higher returns attract foreign capital → inflows rise. (ii) Foreign investors must buy Tessia's currency → its currency appreciates.
(d) 1 pt: The appreciation makes exports pricier and imports cheaper → net exports fall (partially offsetting the fiscal expansion).

FRQ 3 rubric (5 points)

(a) 1 pt: FOREX graph for the ven: y-axis "orils per ven," downward demand for ven, upward supply of ven, e₁ labeled.
(b) 2 pts: Orlin's higher rates make oril assets more attractive → Veyrans buy oril assets → supply of ven shifts right (1; equivalently, demand for ven shifts left as Orlin's investors keep funds home — either single-curve story with explanation earns it); e₂ < e₁ labeled (1).
(c) 1 pt: The ven depreciates.
(d) 1 pt: A cheaper ven raises Veyra's exports and restrains imports → net exports rise → AD shifts right → real GDP rises in the short run.

Scoring worksheet

Component	Raw	×	Points
Section I (out of 60)	___	1.0	___
FRQ 1 (out of 10)	___	1.5	___
FRQ 2 (out of 5)	___	1.5	___
FRQ 3 (out of 5)	___	1.5	___
Composite (out of 90)			___

Calibration (approximate): 66+ ≈ 5 · 53–65 ≈ 4 · 40–52 ≈ 3 · 30–39 ≈ 2.

Diagnostic map

Missed	Review
1–3	L1 (scarcity, circular flow)
4–5	L2 (GDP)
6–8	L3 (unemployment)
9–12	L4 (inflation, quantity theory)
13–16	L5–L6 (AD, SRAS)
17–18	L7 (gaps, self-correction)
19–23	L8 (fiscal policy, multipliers)
24–26	L9 (money, banking)
27–30	L10 (monetary policy)
31–35	L11 (loanable funds)
36–40	L12–L13 (Phillips curves, expectations)
41–46	L14 (growth)
47–55	L15 + L11 (open economy, capital flows)
56–60	Synthesis (multi-unit chains)

Final advice: The synthesis block (Q56–60) is what separates 4s from 5s — chains that cross units: policy → rates → currency → net exports, or stimulus → expectations → Phillips shifts. If those went well, drill FRQ graph speed. If they didn't, reread the "thread" sections in Lessons 5, 8, 10, 11, and 15 — the real interest rate connects all of them, and the exam knows it.

Score summary

Your running multiple-choice score appears in the bar below. Self-score the free-response section with the rubrics in the answer key, then use the diagnostic table to target review.

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