2024, Set 1, Question 1 · Long · 10 points
2024 AP Macroeconomics FRQ 1 (Set 1) answers
Recession, self-adjustment and monetary policy in Alpha
Find the natural unemployment rate from the given rates, graph the recessionary gap and its long-run fix, then pick an ample reserves policy action, graph the reserve market, and trace effects on bond prices and prices.
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Lessons this question draws on
1 Read the question
The question is College Board's, from the 2024, 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.
Alpha has cyclical unemployment, so it is in a recession: output is below full employment. Keep that in mind and every later part points the same way. Without policy, wages fall and SRAS shifts right. With policy, the central bank lowers the rates it administers.
Part a 1 point
Model answer
The natural rate is the actual rate minus cyclical unemployment: 8% minus 3% = 5%. (Equivalently, structural unemployment is 8 minus 3 minus 4 = 1%, and the natural rate is frictional plus structural, 4% + 1% = 5%.)
What earns the point
- 5%, with the work shown. Actual unemployment is natural plus cyclical, so take cyclical away. Either route to 5% earns it as long as the arithmetic is on the page.
Part b 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. With cyclical unemployment of 3%, output is below full employment, 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. Cyclical unemployment above zero means a recessionary gap: the economy is producing less than it could at full employment.
Part c 2 points
Model answer
(i) With unemployment above its natural rate, workers accept lower nominal wages over time, and input prices and inflation expectations fall. Cheaper inputs make firms willing to supply more at every price level, so SRAS shifts right until it meets AD at full employment.
(ii) On the graph, SRAS shifts right from SRAS1 to SRAS2 and crosses AD1 on the LRAS, at YF and a lower price level PL2.
What earns each point
- Input prices such as nominal wages (or inflation expectations) fall, so SRAS increases until the economy reaches full employment. The cause is the point. Knowing that SRAS moves right is not enough; the answer has to say what moves it. Moving AD, or pointing to automatic stabilizers, is a different mechanism.
- SRAS shifted right until it meets AD and LRAS, at a lower price level PL2. The new SRAS has to cross AD exactly on the LRAS, so output is back at YF, and the price level ends lower than PL1.
Part d 1 point
Model answer
The central bank would lower its administered interest rates, for example the interest rate it pays on reserves.
What earns the point
- Lower the administered rates, such as the interest on reserves. That is the action. Lowering the policy rate is what the action achieves, not the action itself, and buying bonds or cutting the reserve requirement belongs to a limited reserves system.
Part e 2 points
Model answer
Draw the reserve market: quantity of reserves across, policy rate up. Demand for reserves is flat at the top, slopes down, and is flat again at the bottom, at the interest rate on reserves. Supply of reserves is vertical and crosses demand in the flat bottom stretch, the range of ample reserves. Cutting the interest rate on reserves lowers that bottom stretch, so the policy rate falls from PR1 to PR2 while the quantity of reserves does not change.
What earns each point
- A correctly labeled reserve market, with supply crossing demand in the ample range. The ample range is the flat bottom of the demand curve. Drawing a money market, or this shape labeled as money demand and money supply, does not earn it.
- The lower administered rate shown as a lower bound on demand, and a lower policy rate. The interest on reserves sets the floor of the demand curve, so lowering it lowers the policy rate. The supply curve stays where it is.
Part f 2 points
Model answer
(i) The price of previously issued bonds increases, because older bonds pay a higher rate than new ones now do. (ii) The price level increases. Lower interest rates make borrowing cheaper, so interest-sensitive spending such as business investment and household spending on homes and cars rises. That raises aggregate demand, and with it the price level.
What earns each point
- Bond prices increase and the price level increases. Both directions are needed for this point. Bond prices move opposite to interest rates.
- Lower rates raise interest-sensitive spending (consumption, investment or net exports), which raises aggregate demand. Saying that lower rates raise aggregate demand skips the step the readers wanted: which spending rises, and why.
Common mistakes
From what the exam readers reported seeing in 2024 students' answers, in our words:
- In part (c)(i), saying SRAS shifts right without saying why. The cause is lower nominal wages or other input prices, or lower inflation expectations. Some answers moved AD instead, or credited automatic stabilizers.
- In part (d), giving a limited reserves tool (buying bonds, cutting the reserve requirement) or a fiscal policy, or naming the result (a lower policy rate) as if it were the action.
- In part (e), drawing a money market or an AD and AS graph, labeling the reserve curves as money demand and money supply, leaving out the supply of reserves, or moving the whole demand curve instead of just its flat bounds.
- In part (f), getting the bond price backward, or saying aggregate demand rises without naming the interest-sensitive spending that causes it.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.