2004 AP Macroeconomics Free Response...

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AP Macroeconomics – Growth Clark Ross Online Resources Foundation for Teaching Economics http://www.fte.org Living Standards & Economic Growth – a primer http://www.economicadventure.org/teachers/primer.pdf World Bank http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTMACROECO/0,,contentMDK:21488475~pagePK:64168182~piPK:64168060~theSitePK:477872,00.html Federal Reserve Bank of New York http://www.ny.frb.org/education/highschool.html

http://www.fte.org/

http://www.economicadventure.org/teachers/primer.pdf

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/EXTPROGRAMS/EXTMACROECO/0,,contentMDK:21488475%7EpagePK:64168182%7EpiPK:64168060%7EtheSitePK:477872,00.html



http://www.ny.frb.org/education/highschool.html


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AP® Macroeconomics2004 Free-Response Questions

The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 4,500 schools, colleges, universities, and other educational organizations. Each year, the College Board serves over three million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT®, the

PSAT/NMSQT®, and the Advanced Placement Program® (AP®). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

For further information, visit www.collegeboard.com

Copyright © 2004 College Entrance Examination Board. All rights reserved. College Board, Advanced Placement Program, AP, AP Central,

AP Vertical Teams, APCD, Pacesetter, Pre-AP, SAT, Student Search Service, and the acorn logo are registered trademarks of the College Entrance Examination Board. PSAT/NMSQT is a registered trademark jointly owned by the

College Entrance Examination Board and the National Merit Scholarship Corporation. Educational Testing Service and ETS are registered trademarks of Educational Testing Service.

Other products and services may be trademarks of their respective owners.

For the College Board’s online home for AP professionals, visit AP Central at apcentral.collegeboard.com.

The materials included in these files are intended for noncommercial use by AP teachers for course and exam preparation; permission for any other use

must be sought from the Advanced Placement Program®. Teachers may reproduce them, in whole or in part, in limited quantities, for face-to-face

teaching purposes but may not mass distribute the materials, electronically or otherwise. This permission does not apply to any

third-party copyrights contained herein. These materials and any copies made of them may not be resold, and the copyright notices

must be retained as they appear here.

2004 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS

Copyright © 2004 by College Entrance Examination Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for AP students and parents).

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MACROECONOMICS Section II

Planning Time—10 minutes Writing Time—50 minutes

Directions: You have fifty minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. 1. Assume that the United States economy is operating at less than full employment.

(a) Using a correctly labeled aggregate demand and aggregate supply graph, show the following.

(i) Full-employment output

(ii) Current output

(iii) Current price level

(b) Identify an open-market operation that could restore full employment in the short run.

(c) Using a correctly labeled graph of the money market, show how the open-market operation you identified in part (b) affects the interest rate in the short run.

(d) Explain how the change in the interest rate you identified in part (c) will affect aggregate demand.

(e) Show on the graph in part (a) how the change in the interest rate you identified in part (c) will affect output and price level.

(f) Instead of the open-market operation in part (b), suppose that no policy actions are taken to address the unemployment problem. With flexible prices and wages, explain how each of the following will eventually change.

(i) Short-run aggregate supply

(ii) Output and price level



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2. (a) Assume that national saving in the United States increases. Explain the effect of this increase on the real interest rate in the United States.

(b) Suppose that real interest rates in the rest of the world remain unchanged.

(i) Explain the effect of the real interest rate change in the United States that you identified in part (a) on the demand for the United States dollar in the foreign exchange market.

(ii) As a result of the effect you identified in (i), what will happen to the international value of the United States dollar?

(c) Given your answer in part (b), indicate how each of the following will change.

(i) United States imports

(ii) United States exports



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3. The Federal Reserve buys $5,000 in bonds from Clark Consulting Services, which then deposits the money in a checking account at First Generation Bank.

(a) As a result of the Federal Reserve’s action, what is the change in the money supply if the required reserve ratio is 100 percent?

(b) If the required reserve ratio is reduced to 10 percent, calculate the following.

(i) The maximum amount this bank could lend from this deposit

(ii) The maximum increase in the total money supply from the Federal Reserve’s purchase of bonds

(c) If banks keep some of the deposit as excess reserves, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain.

(d) If the public decides to hold some money in the form of currency rather than in demand deposits, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain.

END OF EXAMINATION


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AP® Macroeconomics2004 Scoring Guidelines

The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 4,500 schools, colleges, universities, and other educational organizations. Each year, the College Board serves over three million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT®, the

PSAT/NMSQT®, and the Advanced Placement Program® (AP®). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

For further information, visit www.collegeboard.com

Copyright © 2004 College Entrance Examination Board. All rights reserved. College Board, Advanced Placement Program, AP, AP Central,

AP Vertical Teams, APCD, Pacesetter, Pre-AP, SAT, Student Search Service, and the acorn logo are registered trademarks of the College Entrance Examination Board. PSAT/NMSQT is a registered trademark of the

College Entrance Examination Board and National Merit Scholarship Corporation. Educational Testing Service and ETS are registered trademarks of Educational Testing Service.

Other products and services may be trademarks of their respective owners.

For the College Board’s online home for AP professionals, visit AP Central at apcentral.collegeboard.com.

The materials included in these files are intended for noncommercial use by AP teachers for course and exam preparation; permission for any other use

must be sought from the Advanced Placement Program®. Teachers may reproduce them, in whole or in part, in limited quantities, for face-to-face

teaching purposes but may not mass distribute the materials, electronically or otherwise. This permission does not apply to any

third-party copyrights contained herein. These materials and any copies made of them may not be resold, and the copyright notices

must be retained as they appear here.

AP® MACROECONOMICS 2004 SCORING GUIDELINES


2

Question 1

Correct Answer:

(a) Draw a correctly labeled AS/AD graph illustrating an economy operating below full employment and showing current price level and output as shown below in the rubrics section.

(b) The Fed should purchase government bonds to move the economy towards full employment.

(c) A correctly labeled money market graph is shown in the rubrics section. The purchase of bonds by the Fed would increase the money supply, shifting the money supply curve to the right and resulting in a decrease in the interest rate.

(d) The resulting decrease in the interest rate would cause interest-sensitive expenditures (consumption and investment) to increase. Aggregate demand would increase, resulting in an increase in output and price level.

(e) The increase in AD should be shown as a rightward shift of the AD curve toward full-employment GDP on the original AS/AD graph in part (a).

(f) According to classical economic theory, if no action were taken by the Fed to mitigate the recession, wages or other production costs would eventually fall. As a result, the SRAS curve would shift to the right resulting in an increase in output and a decrease in the price level.

Scoring Guidelines: 13 points (3+1+3+2+1+3)

(a) 3 points:

1 - AD/AS graph with full-employment output shown

1 - showing below full-employment equilibrium

1 - current price level and output



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Question 1 (cont’d.)

(b) 1 point: for identifying correct monetary policy: buy bonds

(c) 3 points:

1 - correct graph of the money market

1 - for the rightward shift of the money supply curve

1 - for showing the resulting decrease in the interest rate

(d) 2 points:

1- the decrease in the interest rate causes an increase in I and/or C

1- AD increases as a result of change in C and/or I with a link to the interest-rate change in (c)

(e) 1 point: for the increase in the price level and real output as a result of the AD shift

(f) 3 points:

1 - wages or other production costs would fall

1 - AS curve would shift to the right

1 - price level would fall and real output would rise



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Question 2

Correct Answer:

(a) An increase in savings increases the supply of loanable funds (shifts the supply of loanable funds curve to the right). An increase in the supply of loanable funds will lead to a reduction in the real interest rate.

(b) Because there is a reduction in the US real interest rate (with real rates in the rest of the world unchanged), US financial assets are less attractive, so there will be a decreased demand for US financial assets. With a decreased demand for US financial assets there will be a decreased demand for (and/or increased supply of) the dollar in the foreign exchange market. The decreased demand for the dollar in the foreign exchange market will cause the international value of the US dollar to depreciate.

(c) A depreciation of the dollar makes US goods relatively cheaper than foreign goods, so imports will decrease and exports will increase.

Scoring Guidelines: 7 points (2+3+2)

(a) 2 points:

1 - the supply of saving (loanable funds) increases, shifting the supply curve for loanable funds to the right

1 - the interest rate falls (assertion w/o prior point is ok)

(b) 3 points:

1 - U. S. financial assets become less attractive investment instruments (not just a repeat of the stem)

• must be consistent with the interest change in part (a)

1 - The demand for the U. S. dollar would decrease

• must be consistent with (b)(i) or if answer to (b)(i) is not present, then it must be consistent with the interest rate change given in (a)

1 - The dollar would depreciate

• must be consistent with shift of demand (and/or supply) of dollar

(c) 2 points:

1 - imports will decrease

1 - exports will increase

• must be consistent with appreciation/depreciation of (b)(ii), or if answer to (b)(ii) is not present, then it must be correct (consistent with the stem of the question)

• note that (c) can be scored without having to refer to (a)



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Question 3

Correct Answer:

(a) Since the required reserve ratio is 100%, the increase in the money supply is limited to the $5,000 increase in deposits and reserves that results from the Federal Reserve’s purchase of $5,000 of bonds.

(b) If the required reserve ratio is reduced to 10 percent, this bank may now make new loans of $4,500 (or .9 x $5,000 = $4,500). With a required reserve ratio of 10 percent, the money-supply multiplier is equal to 10; thus, the maximum increase in the money supply would be $50,000 (or $5,000 x 10 = $50,000).

(c) If banks maintain excess reserves, the money supply will not increase by the full-multiplied amount or the $50,000 maximum. Banks will not lend out the full amount of those reserves that may legally be lent.

(d) If the public holds some currency rather than demand deposits, the money supply will not increase by the full-multiplied amount or the $50,000 maximum. Banks will not receive the maximum amount of new deposits and reserves from which they would be making loans.

Scoring Guideline: 7 points (1+2+2+2)

(a) 1 point: the money supply would increase by $5,000

(b) 2 points:

1 - for the correct amount, $4,500 (= 0.9 x 5,000)

1 - for the correct amount from the Fed’s action, $50,000 (= 10 x $5,000)

(c) 2 points:

1 - the increase in the money supply would be less than $50,000

1 - Maximum expansion assumes that banks use all of their excess reserves. Now banks make fewer loans and create less than the maximum possible.

(d) 2 points:

1 - the increase in the money supply would be less than $50,000

1 - increased cash holdings by the public reduce bank deposits, resulting in fewer reserves for the banks


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AP® Macroeconomics 2005 Free-Response Questions

Form B

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The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 4,700 schools, colleges, universities, and other educational organizations. Each year, the College Board serves over three and a half million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT®, the PSAT/NMSQT®, and the Advanced Placement Program® (AP®). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

Copyright © 2005 by College Board. All rights reserved. College Board, AP Central, APCD, Advanced Placement Program, AP, AP Vertical Teams, Pre-AP, SAT, and the acorn logo are registered trademarks of the College Entrance Examination Board. Admitted Class Evaluation Service, CollegeEd, Connect to college success, MyRoad, SAT Professional Development, SAT Readiness Program, and Setting the Cornerstones are trademarks owned by the College Entrance Examination Board. PSAT/NMSQT is a registered trademark of the College Entrance Examination Board and National Merit Scholarship Corporation. Other products and services may be trademarks of their respective owners. Permission to use copyrighted College Board materials may be requested online at: http://www.collegeboard.com/inquiry/cbpermit.html. Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program and Pre-AP: apcentral.collegeboard.com.

2005 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS (Form B)


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Directions: You have fifty minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that a country’s economy is currently at equilibrium along an upward-sloping short-run aggregate

supply curve. Suppose that the country’s central bank conducts an open-market sale of government bonds.

(a) Using a correctly labeled graph of the money market, show how the open-market sale of bonds will affect each of the following.

(i) Money supply

(ii) Interest rate

(b) Indicate whether the interest rate you identified in (a) (ii) is a real or a nominal rate.

(c) Under what condition will the nominal interest rate differ from the real interest rate?

(d) Using a correctly labeled graph of aggregate demand and aggregate supply, show the short-run effect of the open-market operation on each of the following.

(i) Real output

(ii) Price level

(e) On a correctly labeled graph of the Phillips curve, show how the open-market operation will affect the following in the short run. Use an arrow to show the direction of change.

(i) Unemployment rate

(ii) Inflation rate

(f) Identify a fiscal policy action that would offset the impact on real output and price level that you identified in (d).



3

2. Labor productivity is output per unit of labor. An increase in labor productivity is a source of economic growth.

(a) Identify two sources of increase in labor productivity.

(b) Assume that a country’s economy is at full employment. Productivity has been rising. Using a correctly labeled graph of aggregate demand and aggregate supply, show the long-run effect of the growth in productivity on each of the following.

(i) Real output

(ii) Price level

(c) Assume that the economy produces only two goods, good X and good Y. Using a correctly labeled production possibility diagram, show the effect of the increase in labor productivity.

3. Assume that an increase in government spending increases the budget deficit in Country A.

(a) Using a correctly labeled graph of the loanable funds market, show the effect of the increase in Country A’s budget deficit on the real interest rate.

(b) Given your answer in (a), what is the effect on business investment in Country A?

(c) The exchange rate between Country A’s dollar and Country B’s peso is determined in a flexible exchange market. Using a correctly labeled graph of the foreign exchange market for Country A’s dollar, show how the interest rate change you identified in (a) affects the international value of Country A’s dollar.

(d) Given your answer to (c), explain how the competitiveness of Country A’s goods changes relative to Country B’s goods.

END OF EXAMINATION


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AP® Macroeconomics 2005 Scoring Guidelines

Form B


The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 4,700 schools, colleges, universities, and other educational organizations. Each year, the College Board serves over three and a half million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT®, the PSAT/NMSQT®, and the Advanced Placement Program® (AP®). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

Copyright © 2005 by College Board. All rights reserved. College Board, AP Central, APCD, Advanced Placement Program, AP, AP Vertical Teams, Pre-AP, SAT, and the acorn logo are registered trademarks of the College Entrance Examination Board. Admitted Class Evaluation Service, CollegeEd, Connect to college success, MyRoad, SAT Professional Development, SAT Readiness Program, and Setting the Cornerstones are trademarks owned by the College Entrance Examination Board. PSAT/NMSQT is a registered trademark of the College Entrance Examination Board and National Merit Scholarship Corporation. Other products and services may be trademarks of their respective owners. Permission to use copyrighted College Board materials may be requested online at: http://www.collegeboard.com/inquiry/cbpermit.html. Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program and Pre-AP: apcentral.collegeboard.com.

AP® MACROECONOMICS 2005 SCORING GUIDELINES (Form B)

Copyright © 2005 by College Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for AP students and parents).

2

Question 1 11 points (3 + 1 + 1 + 3 + 2 + 1)

(a) 3 points:

• One point is earned for a correctly labeled graph. • One point is earned for showing leftward shift in the money supply curve. • One point is earned for showing the correct change in interest rate.

(b) 1 point:

• One point is earned for stating that the interest rate is nominal.

(c) 1 point: • One point is earned for stating the correct condition: expected inflation rate is not zero.

(d) 3 points:

• One point is earned for a correctly labeled AD/AS graph. • One point is earned for showing leftward shift of the AD curve. • One point is earned for indicating a decrease in equilibrium price level and output.



3

Question 1 (continued)

(e) 2 points:

• One point is earned for a correctly labeled graph with downward sloping PC. • One point is earned for indicating movement along the curve using an arrow.

(f) 1 point:

• One point is earned for a correct policy: decrease taxes, increase transfer payments, or increase spending.



4

Question 2 7 points (2 + 3 + 2)

(a) 2 points:

• Two points are earned for identifying two correct sources: increase in the quality or quantity of resources, technology, capital, or any other input. (Greater quantity of labor is not acceptable.)

(b) 3 points:

• One point is earned for a correctly labeled graph including AS and AD. • One point is earned for indicating long-run aspect by shifting a vertical LRAS or vertical AS. • One point is earned for correct demonstration or explanation of changes in price level and output

from either a rightward shift of an upward-sloping AS or a vertical AS. (A shift of AD alone or combined with a shift of AS is not acceptable.)

(c) 2 points:

• One point is earned for a correctly labeled graph. • One point is earned for an outward shift of the PPC.



5

Question 3 7 points (2 + 1 + 3 + 1)

(a) 2 points:

• One point is earned for a correctly labeled graph of the loanable funds market showing leftward shift of the S curve or rightward shift of the D curve.

• One point is earned for correct interest-rate change.

(b) 1 point: • One point is earned for stating that business investment will decrease.

(c) 3 points:

• One point is earned for a correctly labeled graph. • One point is earned for rightward shift in the demand for dollar or leftward shift in supply for dollar

or both. • One point is earned for concluding that the dollar appreciates or the peso depreciates.



6


(d) 1 point: • One point is earned for stating that Country A’s goods become less competitive since they are

relatively more expensive than Country B’s goods, or that Country B’s goods become more competitive because they are relatively less expensive than Country A’s goods.


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Form B


The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 5,000 schools, colleges, universities, and other educational organizations. Each year, the College Board serves seven million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT®, the PSAT/NMSQT®, and the Advanced Placement Program® (AP®). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

© 2006 The College Board. All rights reserved. College Board, AP Central, APCD, Advanced Placement Program, AP, AP Vertical Teams, Pre-AP, SAT, and the acorn logo are registered trademarks of the College Board. Admitted Class Evaluation Service, CollegeEd, connect to college success, MyRoad, SAT Professional Development, SAT Readiness Program, and Setting the Cornerstones are trademarks owned by the College Board. PSAT/NMSQT is a registered trademark of the College Board and National Merit Scholarship Corporation. All other products and services may be trademarks of their respective owners. Permission to use copyrighted College Board materials may be requested online at: www.collegeboard.com/inquiry/cbpermit.html. Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program: apcentral.collegeboard.com.


© 2006 The College Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for students and parents).

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Directions: You have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that a country’s economy is operating at less than full employment.

(a) Draw a correctly labeled graph of aggregate demand and aggregate supply, and show each of the following.

(i) Long-run aggregate supply curve

(ii) Current output and price level

(b) Assume that policy makers take no policy action and that prices and wages are flexible. Explain what will happen to each of the following.

(i) Short-run aggregate supply

(ii) Employment

(c) Now assume that instead of taking no policy action, the government implements a special tax incentive to encourage individuals to increase saving for retirement. Draw a correctly labeled graph of the loanable funds market. Show how the real interest rate is affected.

(d) Given your answer in part (c), explain how aggregate supply is affected in the long run.

2. Banks play an important role in determining changes in the money supply.

(a) Assume that a bank receives a cash deposit of $9,000 from a customer. What is the immediate impact of this transaction on the money supply? Explain.

(b) Suppose that the reserve requirement is 10 percent and banks voluntarily keep an additional 10 percent in reserves. Calculate each of the following.

(i) The maximum amount by which this bank will increase its loans from the transaction in part (a)

(ii) The maximum increase in the money supply that will be generated from the transaction in part (a)

(c) Assume that the government increases spending by $9,000, which is financed by a sale of bonds to the central bank.

(i) Indicate what will happen to the money supply.

(ii) Explain what will happen to the money demand.



3

3. Assume that South Korea and Canada are trading partners. The equilibrium exchange rate between the Canadian dollar and the South Korean currency, the won, is shown in the graph of the foreign exchange market, above.

(a) Explain how each of the following will affect the demand for the Canadian dollar.

(i) The inflation rate in Canada is higher than the inflation rate in South Korea.

(ii) Real interest rates in Canada fall relative to real interest rates in South Korea.

(b) Given your answer to part (a)(ii), indicate how the value of the Canadian dollar is affected.

(c) As a result of the currency change in part (b), what will happen to Canadian exports to South Korea? Explain.

STOP

END OF EXAM


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Form B



© 2006 The College Board. All rights reserved. College Board, AP Central, APCD, Advanced Placement Program, AP, AP Vertical Teams, Pre-AP, SAT, and the acorn logo are registered trademarks of the College Board. Admitted Class Evaluation Service, CollegeEd, connect to college success, MyRoad, SAT Professional Development, SAT Readiness Program, and Setting the Cornerstones are trademarks owned by the College Board. PSAT/NMSQT is a registered trademark of the College Board and National Merit Scholarship Corporation. All other products and services may be trademarks of their respective owners. Permission to use copyrighted College Board materials may be requested online at: www.collegeboard.com/inquiry/cbpermit.html. Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program: apcentral.collegeboard.com.



2

Question 1 11 points (3 + 4 + 2 + 2)

(a) 3 points:

• One point is earned for a correctly labeled graph. • One point is earned for a vertical LRAS at full employment. • One point is earned for showing the current output and price level.

(b) 4 points:

• One point is earned for shifting SRAS curve to the right. • One point is earned for explaining that wages decrease, lowering the cost of production. • One point is earned for concluding that employment will increase. • One point is earned for explaining that real output is rising.



3


(c) 2 points:

• One point is earned for a correctly labeled graph. • One point is earned for a rightward shift of the supply curve causing the interest rate to fall.

(d) 2 points:

• One point is earned for stating that LRAS will shift to the right. • One point is earned for explaining that lower real rates increase investment, which increases the

capital stock.



4

Question 2 6 points (2 + 2 + 2) (a) 2 points:

• One point is earned for stating that there is no impact. • One point is earned for explaining that only the composition of the MS changes.

(b) 2 points:

• One point is earned for indicating $7,200. • One point is earned for indicating $36,000.

(c) 2 points:

• One point is earned for stating that money supply increases. • One point is earned for stating that money demand increases because income increases.



5


• One point is earned for stating that demand for Canadian dollars will decrease. • One point is earned for explaining that Korean demand for Canadian goods will decrease. • One point is earned for stating that demand for Canadian dollars will fall. • One point is earned for explaining that Korean demand for Canadian financial assets will decrease.

(b) 1 point:

• One point is earned for concluding that Canadian dollars will depreciate. (c) 2 points:

• One point is earned for stating that Canadian exports to Korea will increase. • One point is earned for explaining that Koreans will find Canadian goods relatively cheaper.


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Form B


The College Board is a not-for-profit membership association whose mission is to connect students to college success and

opportunity. Founded in 1900, the association is composed of more than 5,000 schools, colleges, universities, and other

educational organizations. Each year, the College Board serves seven million students and their parents, 23,000 high schools, and

3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and

teaching and learning. Among its best-known programs are the SAT®

, the PSAT/NMSQT®

, and the Advanced Placement

Program®

(AP®

). The College Board is committed to the principles of excellence and equity, and that commitment is embodied

in all of its programs, services, activities, and concerns.

© 2008 The College Board. All rights reserved. College Board, Advanced Placement Program, AP, AP Central, SAT, and the

acorn logo are registered trademarks of the College Board. PSAT/NMSQT is a registered trademark of the College Board and

National Merit Scholarship Corporation.

Permission to use copyrighted College Board materials may be requested online at:

www.collegeboard.com/inquiry/cbpermit.html.

Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program: apcentral.collegeboard.com.



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MACROECONOMICSSection II


Directions: You have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink.

1. Assume that the economy of Country Z is operating on the upward-sloping portion of its short-run aggregate supply curve. Assume that the government increases spending.

(a) How will the increase in government expenditures affect each of the following in the short run?

(i) Aggregate demand

(ii) Short-run aggregate supply

(b) Using a correctly labeled graph of aggregate demand and aggregate supply, show the effect of the increase in government expenditures on real output and the price level.

(c) Assume that the government funded this increase in expenditure by borrowing from the public. Using a correctly labeled graph of the loanable-funds market, show the effect of the increase in government borrowing on the real interest rate.

(d) Given the change in the real interest rate in part (c), what will be the effect on each of the following on the foreign exchange market?

(i) Supply of Country Z’s currency. Explain.

(ii) The value of Country Z’s currency

(e) Given your answer in part (d) (ii), what will be the effect of the change in the value of Country Z’s currency on Country Z’s exports? Explain.



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2. Suppose that Mexico decreases its tariff rates on all of its imports of automobiles from abroad.

(a) Will each of the following groups benefit from the decrease in the tariff rate?

(i) Mexican consumers

(ii) Mexican automobile manufacturers. Explain.

(b) How would the decrease in the tariff rates affect each of the following in Mexico?

(i) Current account balance. Explain.

(ii) Capital account balance

(c) Given the change in Mexico’s current account in part (b)(i), what will happen to the aggregate demand in Mexico?

OUTPUTS AND PRICES IN GALA LAND

This Year’s Output This Year’s Price

400 loaves of bread $6 per loaf

1,000 gallons of water $2 per gallon

800 pieces of fruit $2 per piece

3. Gala Land produces three final goods: bread, water, and fruit. The table above shows this year’s output and price for each good.

(a) Calculate this year’s nominal gross domestic product (GDP).

(b) Assume that in Gala Land the GDP deflator (GDP price index) is 100 in the base year and 150 this year. Calculate each of the following.

(i) The inflation rate, expressed as a percentage, between the base year and this year

(ii) This year’s real GDP

(c) Since the base year, workers have received a 20 percent increase in their nominal wages. If workers face the same inflation that you calculated in part (b)(i), what has happened to their real wages? Explain.

(d) If the GDP deflator in Gala Land increases unexpectedly, would a borrower with a fixed-interest-rate loan be better off or worse off? Explain.

STOP

END OF EXAM


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Question 1 11 points: (2 + 2 + 2 + 3 + 2) (a) 2 points:

• One point is earned for stating that the aggregate demand will increase. • One point is earned for recognizing that the short-run aggregate supply is not affected.

(b) 2 points: • One point is earned for a correctly labeled graph of aggregate demand and aggregate supply. • One point is earned for showing a rightward shift of the aggregate demand curve and showing an

increase in both real output and the price level.

© 2008 The College Board. All rights reserved. Visit the College Board on the Web: www.collegeboard.com.



(c) 2 points: • One point is earned for a correctly labeled graph of the loanable-funds market. • One point is earned for showing a rightward shift of the demand curve for funds and concluding

that the real interest rate will rise. (A leftward shift of the supply curve is accepted.) (d) 3 points:

• One point is earned for stating that the supply of Country Z’s currency will decrease. • One point is earned for the explanation that the higher interest rate reduces the outflow of funds to

countries that now have a relatively lower interest rate. • One point is earned for concluding that the value of Country Z’s currency will rise or Country Z’s

currency will appreciate. (e) 2 points:

• One point is earned for stating that Country Z’s exports will decrease. • One point is earned for the explanation that the appreciating currency makes Country Z’s goods

relatively more expensive.




• One point is earned for stating yes for Mexican consumers. • One point is earned for stating no for Mexican manufacturers. • One point is earned for the explanation that reducing tariffs will cause the domestic price of

automobiles to fall in Mexico, lowering the production of cars in Mexico.

(b) 3 points: • One point is earned for indicating that the current account will move toward a deficit. • One point is earned for the explanation that the reduction in tariff increases imports relative to

exports. • One point is earned for stating that the capital account will move toward a surplus.

(c) 1 point:

• One point is earned for concluding that aggregate demand will decrease.



Question 3 7 points (1 + 2 + 2 + 2) (a) 1 point:

• One point is earned for calculating today’s GDP = ($6 x 400) + ($2 x 1,000) + ($2 x 800) = $6,000. (b) 2 points:

• One point is earned for stating that the inflation rate is 50 percent [(150-100)/100]. • One point is earned for calculating this year’s real GDP = $6,000/1.5 = $4,000.

(c) 2 points:

• One point is earned for stating that real wages would fall. • One point is earned for the explanation that the wages rose by only 20 percent as compared to the

inflation rate of 50 percent, causing a 30 percent fall in real wages. (d) 2 points:

• One point is earned for concluding that a borrower would be better off. • One point is earned for the explanation that, due to the higher inflation, the borrower is paying

back the loan using fewer real dollars.


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2004 AP Macroeconomics Free Response...

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