2025, Set 1, Question 2 · Short · 5 points · about 12 minutes
2025 AP Macroeconomics FRQ 2 (Set 1) answers
Limited versus ample reserves monetary policy
Choose the right policy tool for a limited reserves system and for an ample reserves system, graph the reserve market, and explain what happens to short-run aggregate supply if nobody acts.
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 2025, 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 4) 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.
The whole question turns on the difference between a banking system with limited reserves and one with ample reserves. With limited reserves the central bank changes the quantity of reserves; with ample reserves it moves the rates it sets, and the policy rate follows.
Part A 1 point
Model answer
Country L would buy bonds (government securities) on the open market. That adds reserves to the banking system, which lowers interest rates and raises spending.
What earns the point
- Buy bonds. In a limited reserves system, an open-market purchase adds reserves and pushes the interest rate down, which is the expansionary move a recession calls for.
Part B 1 point
Model answer
Country A would lower its administered interest rates, for example by cutting the interest rate it pays on reserves.
What earns the point
- Lower the administered rates, such as the interest rate on reserves. With ample reserves, adding a few more reserves barely moves the policy rate, so the central bank works through the rates it sets. Buying bonds or cutting the reserve requirement is the limited reserves answer and did not earn this point.
Part C 2 points
Model answer
Draw the reserve market: quantity of reserves across, the policy rate up. Demand for reserves is flat at the top, slopes down, and flattens out again at the bottom, at the interest rate on reserves. Supply of reserves is vertical and crosses demand in that flat bottom stretch, which is what ample reserves means. When the central bank lowers the interest rate on reserves, the bottom of the demand curve moves down, and the policy rate falls from PR1 to PR2 with the quantity of reserves unchanged.
What earns each point
- A correctly labeled reserve market with supply crossing demand where demand is flat. The ample reserves range is the flat part of the demand curve. A money market graph, or the right shapes labeled as money demand and money supply, did not earn it.
- The lower administered rate shown as a lower bottom to the demand curve, and a lower policy rate. Cutting the rate on reserves lowers the floor under the policy rate. The guideline accepts either drawing: both flat bounds lower (every administered rate cut) or only the lower one (the interest on reserves cut), as here. Supply does not need to move, and a small change in supply within the ample range would not change the rate.
Part D 1 point
Model answer
Short-run aggregate supply increases. With output below full employment, unemployment is high, so nominal wages and other input prices fall over time, and people come to expect lower inflation. Cheaper inputs shift SRAS to the right until the economy is back at full employment.
What earns the point
- SRAS increases, because input prices such as nominal wages fall, or inflation expectations fall. The direction alone is not enough. The point is for the mechanism: the slack in the economy brings input costs down, and lower costs shift SRAS right.
Common mistakes
From what the exam readers reported seeing in 2025 students' answers, in our words:
- In part B, giving the limited reserves answer (buy bonds, cut the reserve requirement) for the ample reserves country, or giving a fiscal policy.
- In part C, drawing a money market or an AD and AS graph instead of the reserve market, or drawing the right shapes and labeling them money demand and money supply.
- Leaving out the supply of reserves, or not marking the policy rate where the two curves meet.
- In part D, saying SRAS increases without saying why: falling nominal wages or falling inflation expectations.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.