2025 AP Macroeconomics FRQ 1 (Set 1) answers

Model answer

Put the unemployment rate on the horizontal axis and the inflation rate on the vertical axis. Draw the short-run Phillips curve (SRPC) sloping down and the long-run Phillips curve (LRPC) as a vertical line at the natural rate of unemployment. Because Vortania is in long-run equilibrium, it sits where the two curves cross. Label that point P.

What earns each point

1. A correctly labeled short-run Phillips curve. Both axes need labels (unemployment rate across, inflation rate up) and the SRPC has to slope down. A curve with the axes swapped or unlabeled does not count as correctly labeled.
2. A vertical LRPC with point P where it meets the SRPC. Long-run equilibrium means unemployment is at its natural rate, which is exactly where the vertical LRPC stands. P has to be on both curves.

Model answer

(i) Real output increases. The construction projects are new investment spending, and investment is part of aggregate demand, so aggregate demand shifts right and real output rises in the short run.

(ii) With expectations unchanged, the SRPC does not move. The economy slides up along it to a point with lower unemployment and higher inflation. That point, labeled S, is on the SRPC to the left of P.

What earns each point

3. Real output increases, because the projects raise investment spending and so raise aggregate demand. The direction alone is not enough. The point needs the chain from construction to investment to aggregate demand, and leaving that step out was a common way to lose the point.
4. Point S on the SRPC, to the left of P. Higher output means lower unemployment, and a demand increase raises inflation, so the economy moves up and left along the curve it is already on. Shifting the SRPC instead would show a change in expectations, which the question rules out.

Model answer

Draw the market for Vortanian crowns: quantity of crowns across, and the price of the crown in marks (RHM per VTC) up. The tariffs make Rhodaran goods dearer, so Vortanians buy fewer imports from Rhodara and need fewer marks. They supply fewer crowns to buy them, so the supply of crowns shifts left, from S1 to S2. The new equilibrium is at a higher price, ER2 above ER1: the crown appreciates.

What earns each point

5. A correctly labeled foreign exchange market for the crown. The vertical axis is the crown's price in the other currency, marks per crown. Writing it upside down (crowns per mark) was a common reason this point was lost, as was leaving the equilibrium unmarked on the axes.
6. Supply of crowns shifts left and the crown's value rises. Fewer imports means fewer crowns offered for marks. Less supply with the same demand raises the price of the crown, which is an appreciation.

Model answer

Net exports decrease. A stronger crown makes Vortanian goods more expensive for Rhodarans and Rhodaran goods cheaper for Vortanians, so exports fall and imports rise.

What earns the point

7. Net exports decrease. The question says to use only the currency change from part C, so the answer follows from the appreciation, not from the tariffs themselves.

Model answer

(i) The capital and financial account moves into surplus. Lower net exports push the current account into deficit, and the balance of payments has to balance, so CA + CFA = 0. With the CFA starting at zero, a current account deficit is matched by a CFA surplus.

(ii) Employment in Vortania decreases.

What earns each point

8. The CFA moves into surplus, because the current account went into deficit and the two must sum to zero. This needs both halves: the direction and the reason. The reason is the identity, CA + CFA = 0. Only about one response in eight earned it.
9. Employment decreases. Net exports are part of aggregate demand. Lower net exports lower aggregate demand, so firms produce less and hire fewer workers. Part E asks only for the direction here.

Model answer

The central bank would sell Vortanian crowns. Selling crowns in the foreign exchange market increases their supply, and a greater supply lowers the crown's price, so it depreciates back toward its value before the tariffs.

What earns the point

10. Sell crowns, because the extra supply makes the crown depreciate. The tool is a currency trade, not an open-market operation, so selling bonds does not earn it. And sell on its own is not enough: the answer has to say that selling raises the supply of crowns, and that is what lowers their value.