2025, Set 2, Question 2 · Short · 5 points · about 12 minutes

2025 AP Macroeconomics FRQ 2 (Set 2) answers

Cooling an overheated economy in Jenland

Choose a central bank action for an economy above full employment, graph the reserve market, and say what happens to old bond prices and the price level.

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 2 exam. It starts on page 4 of the PDF.

Open Question 2 (PDF, page 4)

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.

Part A
Part B
Part C

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.

An economy above full employment needs contractionary policy. With ample reserves, the central bank raises the rates it administers, and every other answer follows from a higher interest rate.

Part A 1 point

Model answer

The central bank would raise its administered interest rates, for example the interest rate it pays on reserves.

What earns the point

Raise the administered rates, such as the interest rate on reserves. With ample reserves this is how the central bank moves the policy rate. Selling bonds or raising the reserve requirement is the limited reserves answer and did not earn the point.

Part B 2 points

Model answer

Draw the reserve market with the quantity of reserves across and the policy rate up. Demand for reserves is flat at the top, slopes down, and levels off at the bottom at the interest rate on reserves. The vertical supply of reserves crosses demand in that flat bottom stretch. Raising the interest rate on reserves lifts the bottom of demand, from DR1 to DR2, and the policy rate rises from PR1 to PR2 while the quantity of reserves stays the same.

What earns each point

A correctly labeled reserve market, with supply crossing demand where demand is flat. That flat stretch is what ample reserves looks like on the graph. Fewer than one response in five earned this point, and drawing a money market instead was a common slip.
A higher administered rate, shown as a higher bottom to the demand curve, and a higher policy rate. The rate on reserves is the floor under the policy rate, so lifting it lifts the policy rate. Raising only the lower bound, as here, is one drawing the guideline accepts; raising both flat bounds is the other. Supply stays where it is.

Part C 2 points

Model answer

(i) The price of previously issued bonds decreases. New bonds now pay more, so older bonds with lower rates are worth less.

(ii) The price level decreases. Higher interest rates make borrowing more expensive, so interest-sensitive spending, such as business investment and spending on homes and cars, falls. Aggregate demand decreases, and the price level falls.

What earns each point

Bond prices decrease. Bond prices and interest rates move in opposite directions.
The price level decreases, because higher rates cut interest-sensitive spending and so cut aggregate demand. The chain is the point: interest rate, then spending (investment, consumption or net exports), then aggregate demand, then the price level. Only one response in five gave the whole chain.

Common mistakes

From what the exam readers reported seeing in 2025 students' answers, in our words:

In part A, giving a limited reserves tool (selling bonds, raising the reserve requirement) or a fiscal policy instead of raising the administered rates.
In part B, drawing a money market or an AD and AS graph, or labeling the reserve market's curves as money demand and money supply.
Leaving out the supply of reserves, or not marking the policy rate where supply meets demand.
In part C (ii), stating that the price level falls without linking the interest rate to spending and aggregate demand.

Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.