2023, Set 2, Question 3 · Short · 5 points
2023 AP Macroeconomics FRQ 3 (Set 2) answers
Consumer confidence shock and a central bank response
Graph an economy at full employment, show a rise in consumer confidence, then choose a monetary policy action that holds prices steady and say what it does to output.
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 2 exam. It starts on page 5 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.
Part a 2 points
Model answer
Draw AD sloping down, SRAS sloping up and a vertical LRAS, all crossing at one point, since Zen is in long-run equilibrium. Label the price level there PL1 and the output Y1, which is also YF.
What earns each point
- A correctly labeled AD and AS graph with PL1 and Y1 where AD meets SRAS. Price level up, real output across, and the equilibrium marked on both axes.
- A vertical LRAS at Y1, so Y1 is YF. In long-run equilibrium the economy produces its full-employment output.
Part b 1 point
Model answer
More confident consumers spend more, so AD shifts right from AD1 to AD2. Real output rises to Y2 and the price level rises to PL2.
What earns the point
- AD shifts right, with output rising to Y2 and the price level to PL2. Consumer confidence raises consumption, a part of aggregate demand.
Part c 1 point
Model answer
To bring the price level back down to PL1, the central bank would raise its administered interest rates, for example the interest rate on reserves.
What earns the point
- Raise the administered rates, such as interest on reserves. The price level rose, so the central bank needs contractionary policy, and with ample reserves that means raising the rates it sets. Selling bonds or raising the reserve requirement belongs to a limited reserves system.
Part d 1 point
Model answer
Real output decreases. Higher interest rates make borrowing more expensive, so interest-sensitive spending, such as business investment and household spending on homes and cars, falls. Aggregate demand decreases, and so does real output.
What earns the point
- Real output decreases, because higher rates cut interest-sensitive spending and so cut aggregate demand. The explanation needs the chain from the interest rate to spending to aggregate demand.
Common mistakes
From what the exam readers reported seeing in 2023 students' answers, in our words:
- In part (c), knowing the policy had to be contractionary but naming a limited reserves tool, selling bonds or raising the required reserve ratio, in an ample reserves system.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.