2025, Set 2, Question 1 · Long · 10 points · about 25 minutes
2025 AP Macroeconomics FRQ 1 (Set 2) answers
Phillips curve, deficits and capital flows in Barrikos
Find the actual unemployment rate from its parts, plot the Phillips curves, choose a fiscal policy and judge its effect on the budget, then trace it through loanable funds to capital flows and the currency.
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 2025, 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.
Start by sorting the table. The natural rate already includes structural (and frictional) unemployment, so structural unemployment is not added again. Everything after part B follows one chain: expansionary fiscal policy, a budget deficit, more borrowing, a higher real interest rate, capital flowing in, a stronger currency.
Part A 1 point
Model answer
The actual unemployment rate is the natural rate plus cyclical unemployment: 4% + 6% = 10%. Structural unemployment is already part of the 4% natural rate, so it is not added again.
What earns the point
- 10%. Natural plus cyclical. Adding all three numbers gives 11%, and adding cyclical to structural gives 7%; both were common and both miss the point.
Part B 2 points
Model answer
Put the unemployment rate across and the inflation rate up. Draw a vertical LRPC at the natural rate, 4%. The SRPC slopes down and crosses the LRPC at the expected inflation rate, 5%. The economy is actually at 10% unemployment and 3% inflation, so point X is on the SRPC at (10%, 3%), to the right of the LRPC.
What earns each point
- A correctly labeled SRPC. Unemployment rate across, inflation rate up, and a curve that slopes down.
- A vertical LRPC at 4%, the SRPC crossing it at 5%, and X on the SRPC at 10% and 3%. This point is all about putting the numbers where they belong. The curves cross at the expected inflation rate, because that is the inflation rate when unemployment is at its natural rate. X is the current short-run position, to the right of the LRPC because unemployment is above natural.
Part C 1 point
Model answer
Unemployment is above its natural rate, so the economy needs a boost. The government could increase government spending (cutting taxes or raising transfer payments would also work).
What earns the point
- An expansionary fiscal action: more government spending, lower taxes or higher transfer payments. The graph shows unemployment above natural, a recessionary situation, so the fiscal action has to raise aggregate demand. Any one of the three earns it; a monetary policy action does not, since the question asks for fiscal policy.
Part D 4 points
Model answer
(i) The budget moves into deficit. It starts balanced, and the policy raises spending (or cuts tax revenue), so government outlays are now greater than its revenue.
(ii) Expectations do not change, so the SRPC stays put and the economy moves up along it. Z is on the SRPC to the left of X: lower unemployment, higher inflation.
(iii) In the loanable funds market (quantity of loanable funds across, real interest rate up), the government borrows to cover the deficit. Demand for loanable funds shifts right, from D1 to D2, and the real interest rate rises from r1 to r2.
What earns each point
- Deficit, because outlays are now greater than revenue. The explanation has to compare what the government spends with what it collects. Confusing a budget deficit with a trade deficit or a capital account deficit loses the point.
- Z on the SRPC, to the left of X. Expansionary policy lowers unemployment and raises inflation, a move along the existing SRPC. With expectations unchanged there is no new SRPC.
- A correctly labeled loanable funds graph. Real interest rate up (real, not nominal), quantity of loanable funds across, demand sloping down and supply sloping up.
- Demand for loanable funds rises (or supply falls) and the real interest rate rises. Borrowing to cover the deficit adds to demand. Showing it as lower supply, because government saving falls, is also accepted. Either way the real rate goes up.
Part E 1 point
Model answer
The CFA moves into surplus. A higher real interest rate in Barrikos means a better return on lending there, so foreign investors buy more Barrikan financial assets. Financial capital flows in.
What earns the point
- Surplus, because higher real interest rates draw financial capital in. The answer needs the cause and effect: investors look for the higher return, so capital inflows rise. Stating surplus alone did not earn the point.
Part F 1 point
Model answer
The currency appreciates. Foreign investors need Barrikos' currency to buy its financial assets, so demand for the currency increases, and its price in other currencies rises.
What earns the point
- Appreciates, because demand for the currency increases. The reason has to come from the foreign exchange market: more demand for the currency (or, put the other way, less supply of it). A higher interest rate alone is not that reason.
Common mistakes
From what the exam readers reported seeing in 2025 students' answers, in our words:
- In part A, adding all three rates to get 11%, or cyclical plus structural to get 7%. Only about a third of responses found 10%.
- In part B, drawing the right shapes but not putting 4%, 5%, 10% and 3% where they belong on the axes, or leaving off axis and curve labels.
- In part D (i), mixing up a budget deficit with a trade or capital account deficit, or not comparing spending with revenue.
- In parts E and F, giving the right direction with no reason: E needs higher real rates drawing in capital, and F needs a change in demand for (or supply of) the currency.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.