2024, Set 2, Question 2 · Short · 5 points
2024 AP Macroeconomics FRQ 2 (Set 2) answers
Maltrose GDP deflator and winners from inflation
Use a two-good price and quantity table to find nominal GDP, the deflator and inflation, then decide whether fixed-income earners and fixed-rate borrowers come out ahead when inflation beats expectations.
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 2 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
Nominal GDP in year 2 uses year 2 prices and quantities: ($13 × 10) + ($4 × 20) = $130 + $80 = $210.
What earns the point
- $210, with the work shown. Nominal GDP values each year's output at that year's prices.
Part b 1 point
Model answer
Real GDP in year 2 values year 2 quantities at year 1 prices: ($10 × 10) + ($5 × 20) = $200. The GDP deflator is nominal GDP / real GDP × 100 = $210 / $200 × 100 = 105.
What earns the point
- 105, with the work shown. The deflator is nominal over real, times 100. Flipping the fraction gives a number below 100. Writing the deflator as a percent or a dollar amount was another misconception the readers reported: it is an index number.
Part c 1 point
Model answer
5%. The deflator went from 100 in the base year to 105.
What earns the point
- 5%. The GDP deflator is a price index, so its percentage change is the inflation rate: (105 minus 100) / 100.
Part d 2 points
Model answer
(i) People living on a fixed income were worse off. Prices rose 5% and their income did not.
(ii) Borrowers with fixed-rate loans were better off. Inflation was 5%, more than the 3% they expected when the loan rate was set, so the real interest rate they pay is lower than expected and the real value of what they owe fell by more than they planned for.
What earns each point
- Fixed-income people were worse off. Their dollars buy less once prices rise.
- Borrowers were better off, because inflation above what was expected cut the real value of their debt (or the real interest rate) more than they expected. The comparison with expected inflation is what makes it unexpected: 5% actual against 3% expected. The readers reported that students had difficulty explaining it.
Common mistakes
From what the exam readers reported seeing in 2024 students' answers, in our words:
- In part (b), dividing real GDP by nominal GDP so the deflator comes out below 100, or writing it as a percent or a dollar figure.
- In part (c), not using the change in the GDP deflator to find the inflation rate.
- In part (d)(ii), saying borrowers were better off without explaining that inflation above the expected rate lowers the real value of the debt or the real interest rate.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.