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.

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 2005 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS

MACROECONOMICS
Section II
Planning time—10 minutes
Writing time—50 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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 2005 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS

2. The graph above shows the loanable funds market for a country.
(a) Assume that now the country’s 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 country’s currency
(ii) The value of the country’s currency

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 2005 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS
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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4
 AP® Macroeconomics
2005 Scoring Guidelines

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.
 AP® MACROECONOMICS
2005 SCORING GUIDELINES
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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 AP® MACROECONOMICS
2005 SCORING GUIDELINES
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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 AP® MACROECONOMICS
2005 SCORING GUIDELINES
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 country’s financial assets.
• One point is earned for stating that the demand for the country’s currency will increase.
• One point is earned for stating that the country’s currency will appreciate.

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 AP® MACROECONOMICS
2005 SCORING GUIDELINES
Question 3

6 points (2 + 2 + 1 + 1)

(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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5
 AP® Macroeconomics
2005 Free-Response Questions
Form B

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.
 2005 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS (Form B)

MACROECONOMICS
Section II
Planning Time—10 minutes
Writing Time—50 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 a country’s economy is currently at equilibrium along an upward-sloping short-run aggregate
supply curve. Suppose that the country’s 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
 2005 AP® MACROECONOMICS FREE-RESPONSE QUESTIONS (Form B)
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 country’s 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 A’s
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 A’s dollar and Country B’s peso is determined in a flexible exchange
market. Using a correctly labeled graph of the foreign exchange market for Country A’s dollar, show how
the interest rate change you identified in (a) affects the international value of Country A’s dollar.
(d) Given your answer to (c), explain how the competitiveness of Country A’s goods changes relative to
Country B’s goods.

END OF EXAMINATION

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3
 AP® Macroeconomics
2005 Scoring Guidelines
Form B

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.
 AP® MACROECONOMICS
2005 SCORING GUIDELINES (Form B)
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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2
 AP® MACROECONOMICS
2005 SCORING GUIDELINES (Form B)
Question 1 (continued)

(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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3
 AP® MACROECONOMICS
2005 SCORING GUIDELINES (Form B)
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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4
 AP® MACROECONOMICS
2005 SCORING GUIDELINES (Form B)
Question 3

7 points (2 + 1 + 3 + 1)

(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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5
 AP® MACROECONOMICS
2005 SCORING GUIDELINES (Form B)
Question 3 (continued)

(d) 1 point:
• One point is earned for stating that Country A’s goods become less competitive since they are
relatively more expensive than Country B’s goods, or that Country B’s goods become more
competitive because they are relatively less expensive than Country A’s goods.

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