2023, Set 1, Question 1 · Long · 10 points
2023 AP Macroeconomics FRQ 1 (Set 1) answers
Closing a recessionary gap in Vanderlandia
Graph an economy below full employment, explain how it self-corrects, use the spending multiplier to size a government spending change, and trace that change through the loanable funds market to bond prices and long-run growth.
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Lessons this question draws on
1 Read the question
The question is College Board's, from the 2023, Set 1 exam. It starts on page 3 of the PDF.
2 Write your answer
Answer each part the way you would on the exam, in full sentences, with your work shown. Your writing saves as you type.
3 Score it
Score your answer against College Board's scoring guidelines, one point at a time. Give yourself a point only when your answer says what the guideline asks for.
Scoring guidelines (PDF, page 2) What the exam readers saw (Chief Reader report)
4 Worked answer and scoring
Here is how a response that earns every point could read, part by part, and what each of College Board's scoring points asks for, put in our own words. Open a part once you have written your own answer to it. The scoring guidelines PDF above is the official word on every point.
Vanderlandia produces $500 million against a full-employment level of $550 million, so it is $50 million short: a recessionary gap. Parts (b) and (c) are the two ways out, waiting or spending, and parts (d) and (e) follow the spending through borrowing to interest rates, bonds and growth.
Part a 2 points
Model answer
Draw AD sloping down, SRAS sloping up and a vertical LRAS. Label the price level and output where AD meets SRAS as PL1 and Y1. Output is $500 million, below the $550 million full-employment level, so LRAS stands to the right of Y1, at YF.
What earns each point
- A correctly labeled AD and AS graph with PL1 and Y1 where AD meets SRAS. Price level up, real GDP across, and the equilibrium marked on both axes.
- A vertical LRAS to the right of Y1, labeled YF. Actual output, $500 million, is less than full-employment output, $550 million, so YF is the larger number and sits to the right.
Part b 2 points
Model answer
(i) With output below full employment, unemployment is above its natural rate. Over time nominal wages and other input prices fall, and expected inflation falls. Lower costs shift SRAS to the right until it meets AD at full employment.
(ii) The price level ends up less than PL1, because SRAS has moved right along a downward-sloping AD.
What earns each point
- Input prices such as nominal wages (or inflation expectations) fall, so SRAS increases until the economy reaches full employment. The point is for the cause of the shift. The report singled out this explanation as one students found hard.
- Less than PL1. SRAS moving right along an unchanged AD lowers the price level.
Part c 2 points
Model answer
(i) The spending multiplier is 1 / MPS = 1 / 0.2 = 5. The output gap is $550 million minus $500 million = $50 million. The change in government spending is the gap divided by the multiplier: $50 million / 5 = $10 million. Government spending must increase by $10 million.
(ii) The extra spending shifts AD right, from AD1 to AD2. Because the change was sized to close the gap exactly, AD2 crosses SRAS on the LRAS, at YF, and the price level rises to PL2.
What earns each point
- An increase of $10 million, with the work shown. The multiplier is 1 over the MPS, here 5, and the smallest change that closes a $50 million gap is $50 million divided by 5.
- AD shifts right and the new equilibrium is on the LRAS at a higher price level, PL2. A change sized to close the gap exactly brings output to YF, so the new AD has to cross SRAS on the LRAS, above the old price level.
Part d 2 points
Model answer
Draw the loanable funds market: quantity of loanable funds across, real interest rate up. The government borrows to pay for the extra spending, so the demand for loanable funds shifts right, from D1 to D2, and the real interest rate rises from r1 to r2.
What earns each point
- A correctly labeled loanable funds graph. Real interest rate up, quantity of loanable funds across, demand sloping down and supply sloping up.
- Demand for loanable funds increases (or supply decreases), and the real interest rate rises. Government borrowing adds to demand. Treating it as a fall in supply, because public saving falls, is also accepted. Either way the real rate rises.
Part e 2 points
Model answer
(i) The price of previously issued bonds decreases, because new bonds now pay more than the older ones.
(ii) Long-run growth slows. A higher real interest rate raises the cost of borrowing, so firms invest less in physical capital (machines, buildings, equipment), and less is spent on human capital and on research and development. With a smaller stock of capital and slower gains in technology, the economy's capacity grows more slowly.
What earns each point
- Bond prices decrease. Bond prices and interest rates move in opposite directions.
- Long-run growth decreases, because the higher real interest rate cuts investment in physical capital, human capital or research and development. Growth in the long run comes from capital and technology, and the higher cost of borrowing reduces spending on them. The report named this chain as the hard part.
Common mistakes
From what the exam readers reported seeing in 2023 students' answers, in our words:
- In part (b)(i), struggling to explain how the economy adjusts on its own. The cause is falling input prices, nominal wages or inflation expectations, which shift SRAS right.
- In part (e)(ii), not linking the higher real interest rate to lower investment in physical capital, human capital or research and development, and from there to slower long-run growth.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.