2024, Set 1, Question 2 · Short · 5 points
2024 AP Macroeconomics FRQ 2 (Set 1) answers
Real GDP, inflation and living standards in Louland
Use nominal GDP and the GDP deflator to get real GDP, connect the change to money demand and interest rates, compare living standards per person, and judge what happened to real wages.
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 2024, 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.
Part a 1 point
Model answer
Real GDP = nominal GDP / GDP deflator × 100 = 1,035,000 / 115 × 100 = 900,000.
What earns the point
- 900,000, with the work shown. Dividing by the deflator (and multiplying by 100) takes the price change out of nominal GDP.
Part b 1 point
Model answer
Real GDP rose from 800,000 (in the base year, real equals nominal) to 900,000. More output and income means more transactions, so the demand for money increases, and with the money supply unchanged the nominal interest rate increases.
What earns the point
- Money demand increases and the nominal interest rate increases. Both are needed. A rise in real income means people want to hold more money to make purchases, and higher money demand against the same supply pushes the nominal rate up.
Part c 1 point
Model answer
It decreased. Standard of living is measured by real GDP per person. In year 1 that is 800,000 / 1,000 = 800. In year 2 it is 900,000 / 1,200 = 750. Real output grew more slowly than the population, so output per person fell.
What earns the point
- Decreased, because real GDP per capita fell from 800 to 750. Use real GDP, not nominal. Nominal GDP per person rose (800 to 862.50), which is why answers built on nominal GDP got the direction wrong.
Part d 1 point
Model answer
15%. The deflator rose from 100 in the base year to 115 in year 2: (115 minus 100) / 100 = 15%.
What earns the point
- 15%. The GDP deflator is a price index, so its percentage change from year 1 to year 2 is the inflation rate.
Part e 1 point
Model answer
Real wages decreased. Nominal wages rose 10%, but prices rose 15%, so a worker's pay buys less than it did.
What earns the point
- Real wages decreased, because nominal wages rose by less than the inflation rate (10% is less than 15%). The real wage changes by roughly the nominal change minus inflation, here about 10 minus 15, a fall of about 5%.
Common mistakes
From what the exam readers reported seeing in 2024 students' answers, in our words:
- In part (c), using nominal GDP per person instead of real GDP per person to judge the standard of living.
- In part (d), not seeing that the GDP deflator is a price index, so its change is the inflation rate.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.