AP Macroeconomics 2004 Free-Response Questions · AP® Macroeconomics 2004 Free-Response Questions The College Board is a not-for-profit membership association whose mission is to

AP Macroeconomics2004 Free-Response Questions

The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 4,500 schools, colleges, universities, and other educational organizations. Each year, the College Board serves over three million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT, the

PSAT/NMSQT, and the Advanced Placement Program (AP). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

For further information, visit www.collegeboard.com

Copyright 2004 College Entrance Examination Board. All rights reserved. College Board, Advanced Placement Program, AP, AP Central,

AP Vertical Teams, APCD, Pacesetter, Pre-AP, SAT, Student Search Service, and the acorn logo are registered trademarks of the College Entrance Examination Board. PSAT/NMSQT is a registered trademark jointly owned by the

College Entrance Examination Board and the National Merit Scholarship Corporation. Educational Testing Service and ETS are registered trademarks of Educational Testing Service.

Other products and services may be trademarks of their respective owners.

For the College Boards online home for AP professionals, visit AP Central at apcentral.collegeboard.com.

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must be retained as they appear here.

2004 AP MACROECONOMICS FREE-RESPONSE QUESTIONS

Copyright 2004 by College Entrance Examination Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for AP students and parents).

GO ON TO THE NEXT PAGE.

2

MACROECONOMICS Section II

Planning Time10 minutes Writing Time50 minutes

Directions: You have fifty minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. 1. Assume that the United States economy is operating at less than full employment.

(a) Using a correctly labeled aggregate demand and aggregate supply graph, show the following.

(i) Full-employment output

(ii) Current output

(iii) Current price level

(b) Identify an open-market operation that could restore full employment in the short run.

(c) Using a correctly labeled graph of the money market, show how the open-market operation you identified in part (b) affects the interest rate in the short run.

(d) Explain how the change in the interest rate you identified in part (c) will affect aggregate demand.

(e) Show on the graph in part (a) how the change in the interest rate you identified in part (c) will affect output and price level.

(f) Instead of the open-market operation in part (b), suppose that no policy actions are taken to address the unemployment problem. With flexible prices and wages, explain how each of the following will eventually change.

(i) Short-run aggregate supply

(ii) Output and price level

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3

2. (a) Assume that national saving in the United States increases. Explain the effect of this increase on the real interest rate in the United States.

(b) Suppose that real interest rates in the rest of the world remain unchanged.

(i) Explain the effect of the real interest rate change in the United States that you identified in part (a) on the demand for the United States dollar in the foreign exchange market.

(ii) As a result of the effect you identified in (i), what will happen to the international value of the United States dollar?

(c) Given your answer in part (b), indicate how each of the following will change.

(i) United States imports

(ii) United States exports

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3. The Federal Reserve buys $5,000 in bonds from Clark Consulting Services, which then deposits the money in a checking account at First Generation Bank.

(a) As a result of the Federal Reserves action, what is the change in the money supply if the required reserve ratio is 100 percent?

(b) If the required reserve ratio is reduced to 10 percent, calculate the following.

(i) The maximum amount this bank could lend from this deposit

(ii) The maximum increase in the total money supply from the Federal Reserves purchase of bonds

(c) If banks keep some of the deposit as excess reserves, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain.

(d) If the public decides to hold some money in the form of currency rather than in demand deposits, how will this influence the change in the money supply that was determined in part (b)(ii)? Explain.

END OF EXAMINATION

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AP Macroeconomics2004 Scoring Guidelines





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College Entrance Examination Board and National Merit Scholarship Corporation. Educational Testing Service and ETS are registered trademarks of Educational Testing Service.








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AP MACROECONOMICS 2004 SCORING GUIDELINES


2

Question 1

Correct Answer:

(a) Draw a correctly labeled AS/AD graph illustrating an economy operating below full employment and showing current price level and output as shown below in the rubrics section.

(b) The Fed should purchase government bonds to move the economy towards full employment.

(c) A correctly labeled money market graph is shown in the rubrics section. The purchase of bonds by the Fed would increase the money supply, shifting the money supply curve to the right and resulting in a decrease in the interest rate.

(d) The resulting decrease in the interest rate would cause interest-sensitive expenditures (consumption and investment) to increase. Aggregate demand would increase, resulting in an increase in output and price level.

(e) The increase in AD should be shown as a rightward shift of the AD curve toward full-employment GDP on the original AS/AD graph in part (a).

(f) According to classical economic theory, if no action were taken by the Fed to mitigate the recession, wages or other production costs would eventually fall. As a result, the SRAS curve would shift to the right resulting in an increase in output and a decrease in the price level.

Scoring Guidelines: 13 points (3+1+3+2+1+3)

(a) 3 points:

1 - AD/AS graph with full-employment output shown

1 - showing below full-employment equilibrium

1 - current price level and output

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Question 1 (contd.)

(b) 1 point: for identifying correct monetary policy: buy bonds

(c) 3 points:

1 - correct graph of the money market

1 - for the rightward shift of the money supply curve

1 - for showing the resulting decrease in the interest rate

(d) 2 points:

1- the decrease in the interest rate causes an increase in I and/or C

1- AD increases as a result of change in C and/or I with a link to the interest-rate change in (c)

(e) 1 point: for the increase in the price level and real output as a result of the AD shift

(f) 3 points:

1 - wages or other production costs would fall

1 - AS curve would shift to the right

1 - price level would fall and real output would rise

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Question 2

Correct Answer:

(a) An increase in savings increases the supply of loanable funds (shifts the supply of loanable funds curve to the right). An increase in the supply of loanable funds will lead to a reduction in the real interest rate.

(b) Because there is a reduction in the US real interest rate (with real rates in the rest of the world unchanged), US financial assets are less attractive, so there will be a decreased demand for US financial assets. With a decreased demand for US financial assets there will be a decreased demand for (and/or increased supply of) the dollar in the foreign exchange market. The decreased demand for the dollar in the foreign exchange market will cause the international value of the US dollar to depreciate.

(c) A depreciation of the dollar makes US goods relatively cheaper than foreign goods, so imports will decrease and exports will increase.

Scoring Guidelines: 7 points (2+3+2)

(a) 2 points:

1 - the supply of saving (loanable funds) increases, shifting the supply curve for loanable funds to the right

1 - the interest rate falls (assertion w/o prior point is ok)

(b) 3 points:

1 - U. S. financial assets become less attractive investment instruments (not just a repeat of the stem)

must be consistent with the interest change in part (a)

1 - The demand for the U. S. dollar would decrease

must be consistent with (b)(i) or if answer to (b)(i) is not present, then it must be consistent with the interest rate change given in (a)

1 - The dollar would depreciate

must be consistent with shift of demand (and/or supply) of dollar

(c) 2 points:

1 - imports will decrease

1 - exports will increase

must be consistent with appreciation/depreciation of (b)(ii), or if answer to (b)(ii) is not present, then it must be correct (consistent with the stem of the question)

note that (c) can be scored without having to refer to (a)

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Question 3

Correct Answer:

(a) Since the required reserve ratio is 100%, the increase in the money supply is limited to the $5,000 increase in deposits and reserves that results from the Federal Reserves purchase of $5,000 of bonds.

(b) If the required reserve ratio is reduced to 10 percent, this bank may now make new loans of $4,500 (or .9 x $5,000 = $4,500). With a required reserve ratio of 10 percent, the money-supply multiplier is equal to 10; thus, the maximum increase in the money supply would be $50,000 (or $5,000 x 10 = $50,000).

(c) If banks maintain excess reserves, the money supply will not increase by the full-multiplied amount or the $50,000 maximum. Banks will not lend out the full amount of those reserves that may legally be lent.

(d) If the public holds some currency rather than demand deposits, the money supply will not increase by the full-multiplied amount or the $50,000 maximum. Banks will not receive the maximum amount of new deposits and reserves from which they would be making loans.

Scoring Guideline: 7 points (1+2+2+2)

(a) 1 point: the money supply would increase by $5,000

(b) 2 points:

1 - for the correct amount, $4,500 (= 0.9 x 5,000)

1 - for the correct amount from the Feds action, $50,000 (= 10 x $5,000)

(c) 2 points:

1 - the increase in the money supply would be less than $50,000

1 - Maximum expansion assumes that banks use all of their excess reserves. Now banks make fewer loans and create less than the maximum possible.

(d) 2 points:

1 - the increase in the money supply would be less than $50,000

1 - increased cash holdings by the public reduce bank deposits, resulting in fewer reserves for the banks

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AP Macroeconomics2004 Free-Response Questions

Form B





AP Vertical Teams, APCD, Pacesetter, Pre-AP, SAT, Student Search Service, and the acorn logo are registered trademarks of the College Entrance Examination Board. PSAT/NMSQT is a registered trademark jointly owned by the

College Entrance Examination Board and the National Merit Scholarship Corporation. Educational Testing Service and ETS are registered trademarks of Educational Testing Service.








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2004 AP MACROECONOMICS FREE-RESPONSE QUESTIONS (Form B)



2



Directions: You have fifty minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. 1. Assume that a countrys economy is in equilibrium.

(a) Using a correctly labeled aggregate demand and aggregate supply graph, show how an increase in the price of oil, an important natural resource, will affect the following in the short run.

(i) Real output

(ii) Price level

(b) Using a correctly labeled graph, show how the increase in the price of oil affects the short-run Phillips curve.

(c) Assume that the central bank of the country responds to the higher price of oil by increasing the money supply.

(i) Explain the process by which the increase in the money supply will affect the aggregate demand in the short run.

(ii) Indicate how the increase in the money supply will affect real output and the price level.

(d) Now assume that instead of using monetary policy in response to the oil price increase, the government reduces business taxes, which results in lower production costs. Using a new correctly labeled graph, show the effect of the reduction in business taxes on the following.

(i) Real output

(ii) Price level

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2. Due to an international financial crisis, Canada experiences a significant inflow of funds from other countries. Explain the effect that this inflow of funds will have on the following.

(a) The international value of the Canadian dollar

(b) Canadian net exports

(c) The real interest rate in Canada

(d) The level of investment in Canada

OUTPUT PER WORKER PER DAY

Country

Units of Cloth

Units of Food

Newland 10 2 Beeland 10 1

3. The table above gives the production alternatives of two nations that are producing cloth and food, using equal

amounts of resources.

(a) (i) Calculate the opportunity cost of producing a unit of cloth in Newland.

(ii) Calculate the opportunity cost of producing a unit of food in Beeland.

(b) (i) Which nation has the comparative advantage in cloth production?

(ii) Which nation has the comparative advantage in food production?

(c) Now assume that the productivity of Beelands workers triples for each good.

(i) Which country has a comparative advantage in food production?

(ii) Explain how you determined your answer.

END OF EXAMINATION

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AP Macroeconomics2004 Scoring Guidelines

Form B





AP Vertical Teams, APCD, Pacesetter, Pre-AP, SAT, Student Search Service, and the acorn logo are registered trademarks of the College Entrance Examination Board. PSAT/NMSQT is a registered trademark of the

College Entrance Examination Board and National Merit Scholarship Corporation. Educational Testing Service and ETS are registered trademarks of Educational Testing Service.








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AP MACROECONOMICS 2004 SCORING GUIDELINES (Form B)


2

Question 1

12 points (3+2+5+2)

(a) 3 points:

1 - Correctly labeled AD/AS graph. P, Q, S, and D are acceptable as labels provided there is some indication that it is an aggregate graph (PL, RGDP, AD, or AS)

1 - Leftward shift in AS curve

1 - P increases and Q decreases

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Question 1 (contd.)

(b) 2 points:

1 - Correctly labeled graph of the Phillips curve

1 - Rightward shift in the PC (points e1 and e2 are not necessary)

(c) 5 points:

1 - The real interest rate will decrease

1 - The lower real interest rate will cause investment to increase. (Must make the link between the lower interest rate and the investment increase.)

1 - The increase in investment shifts the AD curve to the right. (Must mention the investment link.)

1 - Price level increases

1 - Real output increases

(d) 2 points:

1 AS shifts to the right

1 - Real output increases and price level decreases

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Question 2

8 points (2+2+2+2)

(a) 2 points:

1 The increased demand for Canadian financial assets raises the demand for the Canadian dollar

1 - The international value of the Canadian dollar will increase

(b) 2 points:

1 - The appreciation of the Canadian dollar decreases the price of imports and increases the price of exports. (Just saying that imports increase and exports decrease due to the appreciation is insufficient.)

1 - Canadian net exports will fall

(c) 2 points:

1 - The supply of funds will increase

1 - The real interest rate will fall

(d) 2 points: Answers here must be consistent with the interest rate change in (c)

1 - Investment in plant and equipment will increase

1 - Because the real interest rate will decrease

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Question 3

6 points (2+2+2)

(a) 2 points:

1 One-fifth of a unit of food

1 10 units of cloth

(b) 2 points:

1 Beeland

1 Newland

(c) 2 points:

1 Newland

1 The opportunity cost of producing food has not changed in Beeland

The following is an optional explanation of the answers to (b) and (c):

The opportunity cost of producing a unit of food in Newland is 5 units of cloth. The opportunity cost of producing a unit of food in Beeland is 10 units of cloth. Newland has a lower opportunity cost of producing food and thus a comparative advantage in food production.

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AP Macroeconomics 2005 Free-Response Questions

The College Board: Connecting Students to College Success

The College Board is a not-for-profit membership association whose mission is to connect students to college success and opportunity. Founded in 1900, the association is composed of more than 4,700 schools, colleges, universities, and other educational organizations. Each year, the College Board serves over three and a half million students and their parents, 23,000 high schools, and 3,500 colleges through major programs and services in college admissions, guidance, assessment, financial aid, enrollment, and teaching and learning. Among its best-known programs are the SAT, the PSAT/NMSQT, and the Advanced Placement Program (AP). The College Board is committed to the principles of excellence and equity, and that commitment is embodied in all of its programs, services, activities, and concerns.

Copyright 2005 by College Board. All rights reserved. College Board, AP Central, APCD, Advanced Placement Program, AP, AP Vertical Teams, Pre-AP, SAT, and the acorn logo are registered trademarks of the College Entrance Examination Board. Admitted Class Evaluation Service, CollegeEd, Connect to college success, MyRoad, SAT Professional Development, SAT Readiness Program, and Setting the Cornerstones are trademarks owned by the College Entrance Examination Board. PSAT/NMSQT is a registered trademark of the College Entrance Examination Board and National Merit Scholarship Corporation. Other products and services may be trademarks of their respective owners. Permission to use copyrighted College Board materials may be requested online at: http://www.collegeboard.com/inquiry/cbpermit.html. Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program and Pre-AP: apcentral.collegeboard.com.

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GO ON TO THE NEXT PAGE. 2


Planning time10 minutes Writing time50 minutes

Directions: You have fifty minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that the United States economy is currently in equilibrium at the full-employment level of real gross

domestic product.

(a) Draw a correctly labeled graph of aggregate demand and aggregate supply showing each of the following in the United States.

(i) Output level

(ii) Price level

(b) Japan is a major importer of United States products. Assume that the Japanese economy goes into a recession.

(i) Explain the impact of the Japanese recession on the United States equilibrium output and price levels.

(ii) Show these effects on your graph in part (a).

(c) Assume that the Federal Reserve takes action to curb the effects of the Japanese recession on the United States economy.

(i) What open-market operation would the Federal Reserve undertake?

(ii) Use a correctly labeled graph of the money market to show how the Federal Reserve policy action will affect the nominal interest rate.

(iii) Explain how the change in the nominal interest rate in part (c) (ii) will affect aggregate demand, price level, and real output in the United States.

(d) Define the real interest rate.

(e) Indicate the effect of the open-market operation you identified in part (c) (i) on the real interest rate in the United States.

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2. The graph above shows the loanable funds market for a country.

(a) Assume that now the countrys government increases deficit spending. Explain how the increase in deficit spending will affect the real interest rate.

(b) Indicate how the real interest rate change you identified in part (a) will affect investment in plant and equipment.

(c) Explain how the real interest rate change you identified in part (a) will affect long-term economic growth.

(d) Explain how the real interest rate change you identified in part (a) will affect each of the following in the foreign exchange market.

(i) The demand for the countrys currency

(ii) The value of the countrys currency

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3. Assume that the table below shows the unemployment and inflation data in Country X as a result of a shift in aggregate demand.

Period Unemployment Rate Inflation Rate

Last year 2% 8% This year 5% 4%

(a) Draw a correctly labeled graph of a short-run Phillips curve for Country X, showing the actual

unemployment and inflation rates for both years. Label the Phillips curve as SRPC.

(b) Now assume that the short-run aggregate supply curve has shifted to the left.

(i) Identify one factor that could cause the aggregate supply curve to shift to the left.

(ii) On the graph, show how this shift would affect the short-run Phillips curve.

(c) Assume that the natural rate of unemployment in Country X is 5 percent. Draw a correctly labeled graph of the long-run Phillips curve and label it as LRPC.

(d) What is the relationship between the unemployment rate and the inflation rate in the long run?

END OF EXAM

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AP Macroeconomics 2005 Scoring Guidelines




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Copyright 2005 by College Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for AP students and parents).

2

Question 1 13 points (3 + 3 + 5 + 1 + 1)

(a) 3 points:

One point is earned for a correctly labeled AD/AS graph. One point is earned for showing the equilibrium at full-employment output indicated by a vertical

LRAS or an AS curve with a vertical section. One point is earned for correctly labeled equilibrium price and output levels.

(b) 3 points: One point is earned for stating that U.S. exports fall. One point is earned for showing a decrease in AD on graph in (a). One point is earned for indicating a decrease in equilibrium output and price levels.

(c) 5 points:

One point is earned for prescribing purchase of government bonds. One point is earned for a correctly labeled graph of the money market. One point is earned for showing a shift of the money supply curve to the right producing a

decrease in the interest rate. One point is earned for explaining that the decrease in interest rate leads to an increase in

business investment demand (or an increase in consumption by households), which increases aggregate demand.

One point is earned for explaining that the increase in aggregate demand increases equilibrium price and output levels.

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Question 1 (continued)

(d) 1 point: One point is earned for stating that the real interest rate is the nominal rate minus inflation (or

expected inflation), or that the real interest rate is the nominal rate adjusted for inflation. (e) 1 point:

One point is earned for indicating that the real interest rate falls because the nominal interest rate falls and the price level increases.

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Question 2 8 points (2 + 1 + 2 + 3)

(a) 2 points:

One point is earned for indicating that the demand-for-funds curve shifts to the right or that the supply-of-funds curve shifts to the left.

One point is earned for concluding that the real interest rate will increase. (b) 1 point:

One point is earned for indicating that the investment in plant and equipment will decrease because of the higher real interest rate.

(c) 2 points:

One point is earned for stating that the decrease in investment in plant and equipment will decrease the growth of the capital stock (or reduce capital stock).

One point is earned for concluding that long-term economic growth will decrease.

(d) 3 points: One point is earned for indicating that the real interest-rate increase from part (a) will increase the

demand for the countrys financial assets. One point is earned for stating that the demand for the countrys currency will increase. One point is earned for stating that the countrys currency will appreciate.

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(a) 2 points:

One point is earned for correctly labeling axes. One point is earned for correctly plotting actual data points and showing a downward-sloping

short-run Phillips curve. (b) 2 points:

One point is earned for identifying a correct factor, such as increase in input prices, production costs, expected inflation, or business taxes.

One point is earned for showing an outward shift of the short-run Phillips curve from part (a).

(c) 1 point:

One point is earned for graphing the long-run Phillips curve, vertical at the unemployment rate of 5 percent.

(d) 1 point:

One point is earned for stating that there is no trade-off between inflation and unemployment in the long run.

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Form B




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Directions: You have fifty minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that a countrys economy is currently at equilibrium along an upward-sloping short-run aggregate

supply curve. Suppose that the countrys central bank conducts an open-market sale of government bonds.

(a) Using a correctly labeled graph of the money market, show how the open-market sale of bonds will affect each of the following.

(i) Money supply

(ii) Interest rate

(b) Indicate whether the interest rate you identified in (a) (ii) is a real or a nominal rate.

(c) Under what condition will the nominal interest rate differ from the real interest rate?

(d) Using a correctly labeled graph of aggregate demand and aggregate supply, show the short-run effect of the open-market operation on each of the following.

(i) Real output

(ii) Price level

(e) On a correctly labeled graph of the Phillips curve, show how the open-market operation will affect the following in the short run. Use an arrow to show the direction of change.

(i) Unemployment rate

(ii) Inflation rate

(f) Identify a fiscal policy action that would offset the impact on real output and price level that you identified in (d).

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2. Labor productivity is output per unit of labor. An increase in labor productivity is a source of economic growth.

(a) Identify two sources of increase in labor productivity.

(b) Assume that a countrys economy is at full employment. Productivity has been rising. Using a correctly labeled graph of aggregate demand and aggregate supply, show the long-run effect of the growth in productivity on each of the following.

(i) Real output

(ii) Price level

(c) Assume that the economy produces only two goods, good X and good Y. Using a correctly labeled production possibility diagram, show the effect of the increase in labor productivity.

3. Assume that an increase in government spending increases the budget deficit in Country A.

(a) Using a correctly labeled graph of the loanable funds market, show the effect of the increase in Country As budget deficit on the real interest rate.

(b) Given your answer in (a), what is the effect on business investment in Country A?

(c) The exchange rate between Country As dollar and Country Bs peso is determined in a flexible exchange market. Using a correctly labeled graph of the foreign exchange market for Country As dollar, show how the interest rate change you identified in (a) affects the international value of Country As dollar.

(d) Given your answer to (c), explain how the competitiveness of Country As goods changes relative to Country Bs goods.

END OF EXAMINATION

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Form B




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2

Question 1 11 points (3 + 1 + 1 + 3 + 2 + 1)

(a) 3 points:

One point is earned for a correctly labeled graph. One point is earned for showing leftward shift in the money supply curve. One point is earned for showing the correct change in interest rate.

(b) 1 point:

One point is earned for stating that the interest rate is nominal.

(c) 1 point: One point is earned for stating the correct condition: expected inflation rate is not zero.

(d) 3 points:

One point is earned for a correctly labeled AD/AS graph. One point is earned for showing leftward shift of the AD curve. One point is earned for indicating a decrease in equilibrium price level and output.

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(e) 2 points:

One point is earned for a correctly labeled graph with downward sloping PC. One point is earned for indicating movement along the curve using an arrow.

(f) 1 point:

One point is earned for a correct policy: decrease taxes, increase transfer payments, or increase spending.

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Question 2 7 points (2 + 3 + 2)

(a) 2 points:

Two points are earned for identifying two correct sources: increase in the quality or quantity of resources, technology, capital, or any other input. (Greater quantity of labor is not acceptable.)

(b) 3 points:

One point is earned for a correctly labeled graph including AS and AD. One point is earned for indicating long-run aspect by shifting a vertical LRAS or vertical AS. One point is earned for correct demonstration or explanation of changes in price level and output

from either a rightward shift of an upward-sloping AS or a vertical AS. (A shift of AD alone or combined with a shift of AS is not acceptable.)

(c) 2 points:

One point is earned for a correctly labeled graph. One point is earned for an outward shift of the PPC.

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(a) 2 points:

One point is earned for a correctly labeled graph of the loanable funds market showing leftward shift of the S curve or rightward shift of the D curve.

One point is earned for correct interest-rate change.

(b) 1 point: One point is earned for stating that business investment will decrease.

(c) 3 points:

One point is earned for a correctly labeled graph. One point is earned for rightward shift in the demand for dollar or leftward shift in supply for dollar

or both. One point is earned for concluding that the dollar appreciates or the peso depreciates.

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(d) 1 point: One point is earned for stating that Country As goods become less competitive since they are

relatively more expensive than Country Bs goods, or that Country Bs goods become more competitive because they are relatively less expensive than Country As goods.

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2006 The College Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for students and parents).




Directions: You have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark-blue ink. 1. Assume that the United States economy is currently operating at an equilibrium below full employment.

(a) Draw a correctly labeled graph of aggregate demand and aggregate supply, and show each of the following.

(i) Long-run aggregate supply

(ii) Current equilibrium output and price level

(b) Now assume a significant increase in the world price of oil, a major production input for the United States. Show on your graph in part (a) how the increase in the oil price affects each of the following in the short run.


(ii) Real output and price level

(c) Given your answer in part (b), explain what will happen to unemployment in the United States in the short run.

(d) Assume that the United States trades with Japan. Draw a correctly labeled graph of the foreign exchange market for the United States dollar. Based on your indicated change in real output in part (b), show and explain how the supply of the United States dollar will be affected in the foreign exchange market.

(e) Given your answer in part (d), indicate what will happen to the value of the United States dollar relative to the Japanese yen.

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3

2. Interest rates are important in explaining economic activity.

(a) Using a correctly labeled graph of the money market, show how an increase in the income level will affect the nominal interest rate in the short run.

(b) Using a correctly labeled graph of the loanable funds market, show how a decision by households to increase saving for retirement will affect the real market interest rate in the short run.

(c) Suppose that the nominal interest rate has been 6 percent with no expected inflation. If inflation is now expected to be 2 percent, determine the value of each of the following.

(i) The new nominal interest rate

(ii) The new real interest rate

3. The unemployment rate is an important indicator of the health of the United States economy.

(a) Assume that with the economy at full employment, the government implements an expansionary fiscal policy. How does the actual unemployment rate at the new short-run equilibrium compare with the natural rate of unemployment?

(b) Assume that a significant number of workers are involuntarily changed from full-time to part-time employment. Explain how this will affect the number of people who are officially classified as unemployed.

(c) Assume that the government reduces the level of unemployment compensation.

(i) Explain how this affects the natural rate of unemployment.

(ii) Using a correctly labeled graph, show how this affects the long-run Phillips curve.

STOP

END OF EXAM

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2

Question 1 11 points (3 + 2 + 2 + 3 + 1)

(a) 3 points:

One point is earned for a correctly labeled AS/AD graph. One point is earned for showing a vertical LRAS. One point is earned for showing current output and price level below full employment.

(b) 2 points:

One point is earned for showing a leftward shift of the SRAS curve. One point is earned for showing that real output falls and price level rises.

(c) 2 points:

One point is earned for stating that unemployment increases. One point is earned for explaining that the cause is the decrease in real output.

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3


(d) 3 points:

One point is earned for a correctly labeled graph. One point is earned for explaining that the fall in real income will cause the demand for

imports to decrease. One point is earned for showing that the supply curve for dollars will shift to the left.

(e) 1 point:

One point is earned for stating that the U.S. dollar will appreciate.

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4

Question 2 8 points (3 + 3 + 2)

(a) 3 points:

One point is earned for a correctly labeled graph. One point is earned for showing a rightward shift of the money demand curve. One point is earned for showing that the nominal interest rate is increasing.

(b) 3 points:

One point is earned for a correctly labeled graph. One point is earned for showing a rightward shift of the supply curve for loanable funds. One point is earned for showing that the real interest rate is decreasing.

(c) 2 points:

One point is earned for indicating that the nominal interest rate is 8 percent. One point is earned for indicating that the real interest rate is 6 percent.

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5

Question 3 7 points (1 + 2 + 4) (a) 1 point:

One point is earned for asserting that the actual rate will be lower than the natural rate of unemployment.

(b) 2 points:

One point is earned for asserting that there will be no change in the number unemployed.

One point is earned for explaining that part-time workers are considered employed. (c) 4 points:

One point is earned for asserting that the natural rate of unemployment will fall. One point is earned for explaining that people have more incentive to look for work as

unemployment compensation diminishes. One point is earned for a correctly labeled graph. One point is earned for showing a leftward shift of the long-run Phillips curve.

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Form B




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Directions: You have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that a countrys economy is operating at less than full employment.

(a) Draw a correctly labeled graph of aggregate demand and aggregate supply, and show each of the following.

(i) Long-run aggregate supply curve

(ii) Current output and price level

(b) Assume that policy makers take no policy action and that prices and wages are flexible. Explain what will happen to each of the following.


(ii) Employment

(c) Now assume that instead of taking no policy action, the government implements a special tax incentive to encourage individuals to increase saving for retirement. Draw a correctly labeled graph of the loanable funds market. Show how the real interest rate is affected.

(d) Given your answer in part (c), explain how aggregate supply is affected in the long run.

2. Banks play an important role in determining changes in the money supply.

(a) Assume that a bank receives a cash deposit of $9,000 from a customer. What is the immediate impact of this transaction on the money supply? Explain.

(b) Suppose that the reserve requirement is 10 percent and banks voluntarily keep an additional 10 percent in reserves. Calculate each of the following.

(i) The maximum amount by which this bank will increase its loans from the transaction in part (a)

(ii) The maximum increase in the money supply that will be generated from the transaction in part (a)

(c) Assume that the government increases spending by $9,000, which is financed by a sale of bonds to the central bank.

(i) Indicate what will happen to the money supply.

(ii) Explain what will happen to the money demand.

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3

3. Assume that South Korea and Canada are trading partners. The equilibrium exchange rate between the Canadian dollar and the South Korean currency, the won, is shown in the graph of the foreign exchange market, above.

(a) Explain how each of the following will affect the demand for the Canadian dollar.

(i) The inflation rate in Canada is higher than the inflation rate in South Korea.

(ii) Real interest rates in Canada fall relative to real interest rates in South Korea.

(b) Given your answer to part (a)(ii), indicate how the value of the Canadian dollar is affected.

(c) As a result of the currency change in part (b), what will happen to Canadian exports to South Korea? Explain.

STOP

END OF EXAM

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Form B




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2

Question 1 11 points (3 + 4 + 2 + 2)

(a) 3 points:

One point is earned for a correctly labeled graph. One point is earned for a vertical LRAS at full employment. One point is earned for showing the current output and price level.

(b) 4 points:

One point is earned for shifting SRAS curve to the right. One point is earned for explaining that wages decrease, lowering the cost of production. One point is earned for concluding that employment will increase. One point is earned for explaining that real output is rising.

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3


(c) 2 points:

One point is earned for a correctly labeled graph. One point is earned for a rightward shift of the supply curve causing the interest rate to fall.

(d) 2 points:

One point is earned for stating that LRAS will shift to the right. One point is earned for explaining that lower real rates increase investment, which increases the

capital stock.

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4

Question 2 6 points (2 + 2 + 2) (a) 2 points:

One point is earned for stating that there is no impact. One point is earned for explaining that only the composition of the MS changes.

(b) 2 points:

One point is earned for indicating $7,200. One point is earned for indicating $36,000.

(c) 2 points:

One point is earned for stating that money supply increases. One point is earned for stating that money demand increases because income increases.

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5

Question 3 7 points (4 + 1 + 2) (a) 4 points:

One point is earned for stating that demand for Canadian dollars will decrease. One point is earned for explaining that Korean demand for Canadian goods will decrease. One point is earned for stating that demand for Canadian dollars will fall. One point is earned for explaining that Korean demand for Canadian financial assets will decrease.

(b) 1 point:

One point is earned for concluding that Canadian dollars will depreciate. (c) 2 points:

One point is earned for stating that Canadian exports to Korea will increase. One point is earned for explaining that Koreans will find Canadian goods relatively cheaper.

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2007 The College Board. All rights reserved. College Board, Advanced Placement Program, AP, AP Central, SAT, and the acorn logo are registered trademarks of the College Board. PSAT/NMSQT is a registered trademark of the College Board and National Merit Scholarship Corporation. Permission to use copyrighted College Board materials may be requested online at: www.collegeboard.com/inquiry/cbpermit.html. Visit the College Board on the Web: www.collegeboard.com. AP Central is the official online home for the AP Program: apcentral.collegeboard.com.

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GO ON TO THE NEXT PAGE. -2-



Directions: You have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. Assume that declining stock market prices in the United States cause many United States financial investors to

sell their stocks and increase their money holdings.

(a) Draw a correctly labeled graph of the money market and show the impact of the financial investors actions on each of the following.

(i) Demand for money

(ii) Nominal interest rate

(b) Due to the decline in wealth caused by the change in stock prices, the general price level in the United States falls relative to the price level in Japan, a trading partner. Use a correctly labeled graph of the foreign exchange market for the United States dollar to show the impact of the change in relative price levels on each of the following.

(i) Demand for the dollar

(ii) Price of the dollar (yen/dollar)

(c) How will the change in the price of the dollar you indicated in part (b) (ii) affect net exports of the United States? Explain.

(d) Using a correctly labeled aggregate demand and aggregate supply graph, show how the change in net exports in part (c) will affect each of the following in the short run.

(i) Aggregate demand

(ii) Output and price level

(e) Given your answers to part (d), what will happen to unemployment in the short run? Explain.

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-3-

2. In recent years, the Federal Reserve has made targeting the federal funds rate a main focus of its monetary policy.

(a) Define the federal funds rate.

(b) If the Federal Reserve wants to lower the federal funds rate, what open-market operation would be appropriate?

(c) Assume that the open-market operation that you indicated in part (b) is equal to $10 million. If the required reserve ratio is 0.2, calculate the maximum change in loans throughout the banking system.

(d) Indicate the effect of the open-market operation that you indicated in part (b) on the nominal interest rate.

(e) Assume that the Federal Reserves action results in some inflation. What would be the impact of the open-market operation on the real rate of interest? Explain.

3. Indicate whether each of the following is counted in the United States gross domestic product for the year 2006.

Explain each of your answers.

(a) The value of a used textbook sold through an online auction in 2006

(b) Rent paid in 2006 by residents in an apartment building built in 2000

(c) Commissions earned in 2006 by a stockbroker

(d) The value of automobiles produced in 2006 entirely in South Korea by a firm fully owned by United States citizens

STOP

END OF EXAM

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Question 1

12 Points (3 + 3 + 2 + 3 +1)

(a) 3 points:

One point is earned for a correctly labeled graph of the money market. One point is earned for showing a rightward shift of the money demand curve. One point is earned for the conclusion that the interest rate rises .

(b) 3 points:

One point is earned for a correctly labeled graph of the foreign exchange market. One point is earned for showing an upward shift of the demand curve for the dollar. One point is earned for concluding that the yen price of the dollar increases.

2007 The College Board. All rights reserved. Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for students and parents). www.oneplusone.cn


(c) 2 points:

One point is earned for concluding that net exports will fall. One point is earned for stating that the appreciating dollar makes U.S. goods relatively

more expensive to Japan, so U.S. exports to Japan would fall and imports rise.

(d) 3 points:

One point is earned for a correctly labeled graph of AS/AD. One point is earned for showing a leftward shift of the AD curve. One point is earned for concluding that output and the price level both fall.

(e) 1 point: One point is earned for stating that unemployment rises because output is falling.



Question 2

6 points (1 + 1 + 1 + 1 + 2)

(a) 1 point: One point is earned for stating that the federal funds rate is the interest rate on short-

term loans between banks.

(b) 1 point: One point is earned for stating that the Fed should buy bonds.

(c) 1 point: One point is earned for calculating the maximum change in loans, which is $40 million.

(d) 1 point: One point is earned for stating that the nominal interest rate will fall.

(e) 2 points: One point is earned for stating that the real interest rate will fall. One point is earned for explaining that the real rate falls because the nominal rate has

decreased and inflation has increased.



Question 3

8 points (2 + 2 + 2 + 2)

(a) 2 points:

One point is earned for stating that the value of the textbook is not included. One point is earned for explaining that a used item has already been counted in a

previous year, or is not part of 2006 production. (b) 2 points:

One point is earned for stating that the rent payment is included. One point is earned for explaining that the payment is for service provided in 2006.

(c) 2 points:

One point is earned for stating that the commissions are included. One point is earned for explaining that the commissions represent income for providing

service in 2006. (d) 2 points:

One point is earned for stating that the value is not included in the U.S. GDP. One point is earned for explaining that U.S. GDP does not include production outside of

the U.S.



Form B




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GO ON TO THE NEXT PAGE. -2-



Directions: You have 50 minutes to answer all three of the following questions. It is suggested that you spend approximately half your time on the first question and divide the remaining time equally between the next two questions. In answering the questions, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Use a pen with black or dark blue ink. 1. As

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AP Macroeconomics 2004 Free-Response Questions · AP® Macroeconomics 2004 Free-Response Questions The College Board is a not-for-profit membership association whose mission is to