2023, Set 1, Question 2 · Short · 5 points
2023 AP Macroeconomics FRQ 2 (Set 1) answers
Phillips curve and monetary policy in Noralandia
Place the economy on a Phillips curve graph when inflation is above what people expected, pick a central bank action to bring it down, then follow the interest rate change to capital flows and the currency's value.
Skip to the worked answer and scoring (try the question first if you can)
1 Read the question
The question is College Board's, from the 2023, Set 1 exam. It starts on page 4 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 5) 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.
Inflation above what people expected puts the economy on the SRPC to the left of the LRPC: unemployment is below its natural rate. Bringing inflation down calls for contractionary monetary policy, and with ample reserves that means raising the administered rates.
Part a 2 points
Model answer
Put the unemployment rate across and the inflation rate up. Draw a downward-sloping SRPC and a vertical LRPC at the natural rate of unemployment. The SRPC crosses the LRPC at the expected inflation rate. Actual inflation is higher than that, so point X is on the SRPC above that crossing, which puts it to the left of the LRPC.
What earns each point
- A correctly labeled SRPC. Unemployment rate across, inflation rate up, and a curve that slopes down.
- A correctly labeled LRPC, with X on the SRPC to the left of it. Where the curves cross, actual inflation equals expected inflation. Inflation above that is higher up the SRPC, which is to the left of the LRPC.
Part b 1 point
Model answer
The central bank would raise its administered interest rates, for example the interest rate it pays on reserves.
What earns the point
- Raise the administered rates, such as interest on reserves. With ample reserves, that is how the central bank raises the policy rate. Selling bonds or raising the reserve requirement belongs to a limited reserves system, and the report says students often knew the policy had to be contractionary but still chose those.
Part c 1 point
Model answer
The flow of financial capital into Noralandia increases. Higher interest rates mean a better return on lending in Noralandia, so foreign investors move more funds there.
What earns the point
- An increase, because international investors seek the higher return in Noralandia. The direction needs its reason: a higher interest rate draws in investors looking for a better return.
Part d 1 point
Model answer
Noralandia's currency appreciates. Foreign investors need Noralandia's currency to buy its financial assets, so demand for the currency increases and its value rises.
What earns the point
- Appreciates, because demand for the currency increases (or supply of it decreases). The explanation has to be about the foreign exchange market: more demand for the currency as investors buy it, or, put the other way, less supply of it.
Common mistakes
From what the exam readers reported seeing in 2023 students' answers, in our words:
- In part (b), knowing the policy should be contractionary but naming a limited reserves tool, selling bonds or raising the required reserve ratio, in an ample reserves system.
- In part (c), not linking the higher interest rate to foreign investors moving funds in to earn a higher return.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.