First of all it's Star Fleet, they don't use money. But seriously, I always guessed that it was a holodeck. They just never stated it. With their technology, it would have been simple enough to simulate the explosions that Wes thought were happening when he was alone in that room.
In that case, shouldn't the simulation have disappeared, rather than merely ended? What would be the point of leaving the scenario running?
IIRC, they even have some of the "fallen" debris move back in place to show how fake it all was. Could be misremembering, though.
(We could argue that holodecks in Starfleet were a new thing at the time, while these tests had been running for centuries already, so the facilities would have mechanical sets for the purpose. I mean, yeah, civilians had used holotech for aeons already, as per VOY and Flotter, but the military isn't keen on adopting the latest in entertainment technology in the real world, either. It still sort of defeats the concept of tailoring the test for the applicant.)
Here I beg to differ. They did take up the premise of the psych exam again late in the series, just this time they called it the Bridge Exam. Remember, Troi couldn't pass it until she sent Holo-LaForge to his certain death.
That's hardly a scenario involving a specific "greatest fear", nor an Academy entry exam. Supposedly, Troi would already have taken the latter in some form, even if she only went there for a weekend to learn how (not) to salute.
And yeah, I agree her greatest fear would later be revealed as being something completely unrelated to sending fellow officers to their death.
I wonder what sort of a test it was that Merrick flunked in his fifth Academy year so that he ended up like he did in TOS "Bread and Circuses"... Something more comparable to the final no-win scenario, perhaps? Supposedly, that is all about psychology, too.
Timo Saloniemi