2024, Set 1, Question 3 · Short · 5 points
2024 AP Macroeconomics FRQ 3 (Set 1) answers
Malaysian fiscal policy and the ringgit
Pick a fiscal policy to fight a recession, explain what it does to the real interest rate, show the currency change on a foreign exchange graph, and decide how imports respond.
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 2024, Set 1 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 6) 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.
This is a chain from fiscal policy to the loanable funds market to the foreign exchange market to trade. Say each link out loud: more borrowing, a higher real interest rate, more foreign demand for ringgit, a stronger ringgit, cheaper imports.
Part a 1 point
Model answer
Increase government spending. (Cutting taxes or raising transfer payments would also do it.)
What earns the point
- More government spending, lower taxes or higher transfer payments. A recession calls for expansionary fiscal policy, and any one of the three is enough.
Part b 1 point
Model answer
The real interest rate increases. The budget was balanced, so the policy creates a deficit, and the government borrows to pay for it. That increases the demand for loanable funds, which pushes the real interest rate up.
What earns the point
- The real interest rate increases, because government borrowing raises the demand for loanable funds (or lowers their supply). The link to the loanable funds market is what the readers looked for. Saying that more spending lowers rates is a common wrong turn.
Part c 2 points
Model answer
Draw the market for ringgit: quantity of ringgit across, the price of the ringgit in yen (JPY per MYR) up. A higher real interest rate in Malaysia makes Malaysian assets more attractive to Japanese investors, who need ringgit to buy them. Demand for the ringgit shifts right, from D1 to D2, and the exchange rate rises from ER1 to ER2: the ringgit appreciates.
What earns each point
- A correctly labeled foreign exchange market for the ringgit. The vertical axis is the ringgit's price in yen. Labeling it yen per ringgit is right. The readers reported mislabeled vertical axes as a common mistake on this graph.
- Demand for the ringgit increases (or supply decreases), and the ringgit appreciates. Investors chasing the higher return buy ringgit, so demand rises and so does the ringgit's price in yen. Showing a shift without a new, higher exchange rate does not earn it.
Part d 1 point
Model answer
Malaysia's imports increase. Each ringgit now buys more yen, so Japanese goods cost Malaysians fewer ringgit than before.
What earns the point
- Imports increase, because the stronger ringgit makes Japanese goods relatively cheaper for Malaysians. The explanation has to compare prices across the two countries: the same yen price now takes fewer ringgit.
Common mistakes
From what the exam readers reported seeing in 2024 students' answers, in our words:
- In part (b), saying the real interest rate falls, or giving a direction with no mention of the loanable funds market.
- In part (c), mislabeling the vertical axis, shifting demand or supply of the ringgit in the wrong direction, or not showing the change in the ringgit's value.
- In part (d), saying imports increase without explaining that Japanese goods became cheaper relative to Malaysian ones.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.