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Macroeconomics analyses economy-wide phenomena: GDP, inflation, unemployment, monetary policy, and fiscal policy. Exams test both theoretical models — IS-LM, aggregate demand/supply — and real-world application. Timed practice helps you work through multi-part scenario questions efficiently.

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Topics typically tested

  • GDP measurement & national accounts
  • Aggregate demand & aggregate supply
  • Monetary policy & the money supply
  • Fiscal policy & government spending
  • Unemployment & inflation tradeoffs
  • International trade & exchange rates

Sample Macroeconomics exam questions

Three original questions in the style of a real Macroeconomics exam, each with a worked solution. Your own practice exam can be built from your course's notes and syllabus.

Question 1Multiple choiceGDP measurement & national accounts

An economy reports the following figures for one year, all in billions of dollars: household consumption spending 620; gross private investment 180; government purchases of goods and services 210; government transfer payments (pensions and unemployment benefits) 60; exports 90; imports 120. Using the expenditure approach, what is the economy's GDP?

  1. A.

    $980 billion

  2. B.

    $1,010 billion

  3. C.

    $1,040 billion

  4. D.

    $1,220 billion

Worked solution
Answer:A

The expenditure approach adds up spending on final goods and services produced within the country:

GDP=C+I+G+(X−M)\text{GDP} = C + I + G + (X - M)

Substitute the figures (billions of dollars):

GDP=620+180+210+(90−120)=1,010−30=980\text{GDP} = 620 + 180 + 210 + (90 - 120) = 1{,}010 - 30 = 980

Two items in the list are traps. Transfer payments (the 60) are excluded: a pension cheque moves money from government to households without any good or service being produced in return. The spending shows up in GDP only when the household spends it, and that is already inside CC. Imports are subtracted, not added. Consumption, investment and government purchases all include spending on foreign-made goods, so subtracting MM removes that foreign production and leaves only domestic output.

Option B (1,010) forgets net exports entirely. Option C (1,040) is the most tempting error: it counts transfers as government spending, which double-counts them once households spend the money. Option D (1,220) adds imports instead of subtracting them.

Answer: A — GDP = $980 billion.

Question 2Short answerMonetary policy & the money supply

Commercial banks in an economy hold reserves equal to 10% of their deposits and lend out everything else. The public holds no currency outside the banking system. The central bank buys $50 million of government bonds from a commercial bank in an open-market operation.

(a) What is the simple deposit (money) multiplier?

(b) What is the maximum amount by which the money supply can eventually increase?

(c) Is this an expansionary or a contractionary action?

Worked solution
Answer:

(a) 10; (b) up to $500 million; (c) expansionary.

(a) The multiplier. When banks keep a fraction rr of each deposit as reserves and lend the rest, each dollar of new reserves can support 1/r1/r dollars of deposits. With r=0.10r = 0.10:

Money multiplier=1r=10.10=10\text{Money multiplier} = \frac{1}{r} = \frac{1}{0.10} = 10

(b) The expansion. The central bank pays for the bonds by crediting the bank's reserve account, so the banking system gains $50 million of reserves with no new deposit to back. All of it is excess reserves. The bank lends $50 million; the borrower's spending is deposited at another bank, which keeps 10% ($5 million) and lends $45 million; the next bank keeps $4.5 million and lends $40.5 million, and so on. Summing the geometric series gives

ΔMoney supply=10×50=500\Delta\text{Money supply} = 10 \times 50 = 500

so the money supply can rise by up to $500 million. This is a ceiling: if any bank holds excess reserves or any borrower keeps cash, the actual increase is smaller.

(c) Direction. Buying bonds injects reserves and lowers short-term interest rates, which is expansionary monetary policy. Selling bonds would drain reserves and do the reverse.

Answer: (a) multiplier = 10; (b) the money supply can grow by up to $500 million; (c) expansionary.

Question 3Worked problemFiscal policy & government spending

An economy's real GDP is $1,940 billion and its potential (full-employment) GDP is $2,000 billion. The marginal propensity to consume is 0.75. Assume a closed economy with no income taxes, a fixed price level and no crowding out, so the simple Keynesian multipliers apply.

(a) Compute the government spending multiplier and the lump-sum tax multiplier.

(b) By how much must government purchases rise to close the output gap?

(c) Alternatively, by how much must lump-sum taxes be cut to close the same gap?

(d) Explain in one or two sentences why the answers to (b) and (c) differ.

Worked solution
Answer:

(a) spending multiplier 4, tax multiplier −3; (b) raise government purchases by $15 billion; (c) cut taxes by $20 billion; (d) households save part of a tax cut (1 − MPC), so only 0.75 of each dollar enters the spending stream, whereas every dollar of government purchases is spent directly.

The output gap is 2,000−1,940=602{,}000 - 1{,}940 = 60, so real GDP must rise by $60 billion (a recessionary gap).

(a) Multipliers. With MPC=0.75MPC = 0.75:

Spending multiplier=11−MPC=10.25=4\text{Spending multiplier} = \frac{1}{1 - MPC} = \frac{1}{0.25} = 4 Tax multiplier=−MPC1−MPC=−0.750.25=−3\text{Tax multiplier} = \frac{-MPC}{1 - MPC} = \frac{-0.75}{0.25} = -3

(b) Spending increase. Each dollar of government purchases raises GDP by $4, so set 4 ΔG=604\,\Delta G = 60, giving ΔG=15\Delta G = 15: government purchases must rise by $15 billion.

(c) Tax cut. Set −3 ΔT=60-3\,\Delta T = 60, giving ΔT=−20\Delta T = -20: lump-sum taxes must be cut by $20 billion.

(d) Why the tax cut must be larger. A dollar of government purchases is spent in full on goods and services in the first round. A dollar of tax cut goes to households, who spend only the MPC share (75 cents) and save the rest, so the first-round injection is smaller and every later round is scaled down with it. That is why the tax multiplier is MPC times the spending multiplier in absolute value (MPC×4=0.75×4=3MPC \times 4 = 0.75 \times 4 = 3), and why the required tax cut ($20 billion) is 1/0.751/0.75 times the required spending increase ($15 billion). As a check, a $20 billion tax cut raises first-round consumption by $15 billion, the same injection as the spending plan, so both close the $60 billion gap.

Answer: (a) 4 and −3; (b) raise government purchases by $15 billion; (c) cut taxes by $20 billion; (d) households save part of a tax cut, so its first-round effect is only MPC of each dollar.

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