2024, Set 2, Question 1 · Long · 10 points
2024 AP Macroeconomics FRQ 1 (Set 2) answers
Falling consumer spending and policy in Moneyland
Compute the MPC from the given spending and income data, show the drop in spending on an AD and AS graph, explain long-run adjustment, then choose a monetary policy and show it in the reserve market with its short-run effects.
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Lessons this question draws on
1 Read the question
The question is College Board's, from the 2024, 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.
Moneyland starts at full employment, and a fall in consumer spending pushes it into a recession. From part (c) on, the question asks two ways out: waiting for wages to fall, or a central bank that lowers the rates it administers.
Part a 2 points
Model answer
Draw AD sloping down, SRAS sloping up and a vertical LRAS, all crossing at one point, since unemployment is at its natural rate. 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. Unemployment at its natural rate means the economy is producing its full-employment output, so LRAS passes through the equilibrium.
Part b 2 points
Model answer
(i) MPC = change in consumer spending / change in disposable income = ($100,000 minus $110,000) / ($110,000 minus $135,000) = negative $10,000 / negative $25,000 = 0.4.
(ii) Less consumer spending means less aggregate demand. AD shifts left from AD1 to AD2, so real output falls to Y2 and the price level falls to PL2.
What earns each point
- MPC = 0.4, with the work shown. The marginal propensity uses the changes: 10,000 over 25,000. Dividing spending by income gives the average propensity instead, and 0.6 is the marginal propensity to save.
- AD shifts left, with output falling to Y2 and the price level to PL2. Consumption is a component of aggregate demand, so less consumer spending at every price level moves AD left, lowering both output and prices in the short run.
Part c 1 point
Model answer
With output below full employment, unemployment rises above its natural rate. Over time nominal wages and other input prices fall, and people expect lower inflation. Lower costs shift SRAS to the right until it meets AD2 on the LRAS, so output returns to full employment at an even lower price level.
What earns the point
- Input prices such as nominal wages (or inflation expectations) fall, so SRAS increases until the economy is back at full employment. The cause has to be there. A response that only says SRAS shifts right, or that moves AD back, does not explain the long-run adjustment.
Part d 1 point
Model answer
The central bank would lower its administered interest rates, for example the interest rate on reserves.
What earns the point
- Lower the administered rates, such as interest on reserves. That is the tool in an ample reserves system. A lower policy rate is what it achieves, so naming the policy rate as the action misses; buying bonds or cutting the reserve requirement is the limited reserves answer.
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 at the bottom at the interest rate on reserves. The vertical supply of reserves crosses the flat bottom, the ample reserves range. Lowering the interest rate on reserves lowers the bottom of demand from DR1 to DR2, so the policy rate falls from PR1 to PR2 and 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 demand. A money market graph, or this shape labeled as money demand and money supply, does not earn it.
- The lower administered rate shown as a lower bottom to demand, and a lower policy rate. The flat bounds move, not the whole curve: the readers listed shifting the entire demand curve as a mistake. Lowering only the bottom bound, as here, is one drawing the guideline accepts.
Part f 2 points
Model answer
(i) The quantity of national savings decreases, because a lower interest rate gives people less reward for saving. (ii) Unemployment decreases. Lower interest rates make borrowing cheaper, so interest-sensitive spending, such as business investment and household spending on homes and cars, rises. Aggregate demand and real output rise, and firms hire more workers.
What earns each point
- National savings decreases and unemployment decreases. Both directions are needed. Savings respond to the lower return; unemployment falls because output rises.
- Lower rates raise interest-sensitive spending (consumption, investment or net exports), which raises aggregate demand and real output. The readers wanted the spending link, not just the claim that aggregate demand rises.
Common mistakes
From what the exam readers reported seeing in 2024 students' answers, in our words:
- In part (b)(i), dividing consumption by income (the average propensity to consume), or finding 0.4 and then subtracting it from 1.
- In part (c), saying SRAS shifts right without the cause (falling nominal wages, other input prices or inflation expectations), or moving AD, or crediting automatic stabilizers.
- In part (d), giving a limited reserves tool or a fiscal policy, or naming the lower policy rate as if it were the action.
- In part (e), drawing a money market or an AD and AS graph, labeling the curves as money demand and supply, leaving out supply, or moving the whole demand curve.
- In part (f)(ii), saying aggregate demand rises without naming the interest-sensitive spending behind it.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.