2026, Question 1 · Long · 10 points · about 25 minutes
2026 AP Macroeconomics FRQ 1 answers
Inflationary gap and open-market operations in Micanapy
Graph an inflationary gap and explain self-adjustment, pick an open-market operation for a limited reserves system, graph the money market, and follow the interest rate change to capital flows, bonds, investment and unemployment.
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1 Read the question
The question is College Board's, from the 2026 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)
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 inflationary gap means output is above full employment. Everything here leans the other way: without policy, rising wages pull SRAS back; with policy, the central bank sells bonds, and the higher interest rate it causes cuts investment and output. Note that this banking system has limited reserves, so the open-market tools are the right ones.
Part A 2 points
Model answer
Draw AD sloping down, SRAS sloping up and a vertical LRAS. Label the price level and output where AD meets SRAS as PL1 and Y1. An inflationary gap means output is above full employment, so LRAS stands to the left of Y1, at YF.
What earns each point
- A correctly labeled AD and AS graph with Y1 and PL1 where AD meets SRAS. Price level up, real output across, and the equilibrium marked on both axes.
- A vertical LRAS to the left of Y1, labeled YF. In an inflationary gap the economy is producing more than its full-employment output, so YF is the smaller number.
Part B 1 point
Model answer
With output above full employment, labor is scarce and unemployment is below its natural rate. Over time nominal wages and other input prices rise, and people come to expect higher inflation. Higher costs shift SRAS to the left until it meets AD at full employment, at a higher price level.
What earns the point
- Input prices such as nominal wages (or inflation expectations) rise, so SRAS decreases until the economy is back at full employment. The cause is the point: rising input costs shift SRAS left. Moving AD, or saying SRAS shifts with no reason, does not explain the self-adjustment.
Part C 3 points
Model answer
(i) The central bank would sell bonds (government securities) on the open market.
(ii) Draw the money market: quantity of money across, nominal interest rate up. Money demand slopes down and money supply is vertical. Selling bonds takes money out of the banking system, so money supply shifts left from MS1 to MS2, and the nominal interest rate rises from i1 to i2.
What earns each point
- Sell bonds. In a limited reserves system an open-market sale drains reserves and money from banks, which is the contractionary move an inflationary gap calls for.
- A correctly labeled money market graph. Nominal interest rate up (nominal, not real), quantity of money across, money demand sloping down and money supply vertical.
- Money supply shifts left and the nominal interest rate rises. Less money against the same demand for it raises its price, the nominal interest rate.
Part D 3 points
Model answer
(i) Financial capital flows into Micanapy increase. A higher interest rate means a better return on Micanapy's financial assets, so international investors move more funds there.
(ii) The price of previously issued bonds decreases, because new bonds now pay more than the older ones.
(iii) Private domestic investment spending decreases, because borrowing to build and equip costs more.
What earns each point
- Capital inflows increase, because international investors seek the higher return in Micanapy. The direction needs its reason: investors move money to where it earns more.
- Bond prices decrease. Bond prices and interest rates move in opposite directions.
- Investment spending decreases. Investment is interest-sensitive: a higher rate makes the borrowing behind it more expensive.
Part E 1 point
Model answer
The unemployment rate increases. Investment is part of aggregate demand, so less investment lowers aggregate demand and real output, and firms producing less need fewer workers.
What earns the point
- Unemployment increases, because lower investment lowers aggregate demand and real output. The chain from investment to aggregate demand to output is what explains the change in unemployment.
Question, scoring guidelines and Chief Reader report: College Board. The title, summary and worked answer are ours.