2023, Set 2, Question 1 · Long · 10 points
2023 AP Macroeconomics FRQ 1 (Set 2) answers
Phillips curve and fiscal policy in Northland
Place the economy on both Phillips curves from the rates it gives you, compare the tax and spending multipliers, show what extra government spending does, and explain how the economy adjusts on its own in the long run.
Skip to the worked answer and scoring (try the question first if you can)
Lessons this question draws on
1 Read the question
The question is College Board's, from the 2023, Set 2 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.
Unemployment of 7% against a natural rate of 5% means Northland is in a recession, sitting on its SRPC to the right of the LRPC. The multiplier parts turn on one difference: a tax cut reaches spending only through what households spend of it, so its multiplier is smaller.
Part a 2 points
Model answer
Put the unemployment rate across and the inflation rate up. Draw a vertical LRPC at the natural rate, 5%. Draw a downward-sloping SRPC, and mark point X on it at 7% unemployment and 1% inflation, which puts X to the right of the LRPC.
What earns each point
- A correctly labeled SRPC. Unemployment rate across, inflation rate up, and a curve that slopes down.
- A vertical LRPC at 5%, with X on the SRPC to its right at 7% and 1%. The numbers have to sit where they belong: the LRPC at the natural rate, and X at the actual rates.
Part b 1 point
Model answer
Greater than 1%. Unemployment, 7%, is above its natural rate, 5%, so the economy is in a recession and to the right of the LRPC on its SRPC. The SRPC meets the LRPC at the expected inflation rate, which is higher up the curve than X, so expected inflation is above the actual 1%.
What earns the point
- Greater than 1%, because actual unemployment is above the natural rate (the economy is in a recession). When unemployment is above natural, inflation has come in below what people expected.
Part c 2 points
Model answer
(i) The tax multiplier is MPC / (1 minus MPC) = 0.9 / 0.1 = 9. A $20 billion tax cut can raise aggregate demand by at most $20 billion × 9 = $180 billion.
(ii) The spending multiplier is 1 / (1 minus MPC) = 1 / 0.1 = 10. A $20 billion rise in government spending can raise aggregate demand by at most $20 billion × 10 = $200 billion.
What earns each point
- $180 billion, with the work shown. The tax multiplier is smaller than the spending multiplier by one, because households save part of the tax cut before any of it is spent.
- $200 billion, with the work shown. Government spending is spending from the first dollar, so the full multiplier of 10 applies.
Part d 1 point
Model answer
More government spending raises aggregate demand, so unemployment falls and inflation rises along the same SRPC. Z is on the SRPC to the left of X.
What earns the point
- Z on the SRPC, to the left of X. With expectations unchanged the SRPC stays put, and higher aggregate demand moves the economy up and to the left along it.
Part e 1 point
Model answer
Aggregate demand increases. Unemployment compensation is a transfer payment, so raising it gives the people who receive it more disposable income, and they spend more of it on consumption.
What earns the point
- Aggregate demand increases, because more disposable income raises consumption spending. A transfer is not government purchases of goods and services. It works through households' spending, which is why the readers wanted the link to disposable income and consumption.
Part f 3 points
Model answer
(i) SRAS shifts right. With unemployment above its natural rate, nominal wages and other input prices fall over time, and inflation expectations fall, so firms can supply more at each price level.
(ii) The SRPC shifts left (down), as expected inflation falls.
(iii) The actual unemployment rate decreases, back toward its natural rate of 5%.
What earns each point
- SRAS shifts right, because input prices such as nominal wages (or inflation expectations) fall. The cause of the shift is the point. The report notes that students found it hard to link falling input costs or expectations to the change in SRAS.
- The SRPC shifts left. Lower expected inflation moves the whole short-run curve down and to the left.
- Unemployment decreases. Self-adjustment brings the economy back to the natural rate, which is below the current 7%.
Common mistakes
From what the exam readers reported seeing in 2023 students' answers, in our words:
- In part (c), setting up the tax multiplier or the spending multiplier wrongly, and so getting the arithmetic wrong.
- In part (e), not connecting unemployment compensation to more disposable income and more consumption, or treating the transfer as an increase in government purchases.
- In part (f)(i), not linking lower input costs or inflation expectations to the shift in SRAS.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.