2023 AP Macroeconomics Free-Response Questions

1. Assume the economy of Vanderlandia is in short-run equilibrium with a real GDP of $500 million. The full-employment level of real GDP is $550 million. (a) Draw a correctly labeled graph of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves, and show each of the following. (i) The current equilibrium real output and price level, labeled Y₁ and PL₁, respectively (ii) The full-employment output, labeled Y_F (b) Assume no policy action is taken to restore full employment. (i) Explain how the economy will adjust in the long run. (ii) Following the long-run adjustment process, will the price level in Vanderlandia be greater than, less than, or equal to PL₁ shown on your graph in part (a)? (c) Assume instead that policymakers in Vanderlandia are considering changing government spending to restore full employment in the short run and that the marginal propensity to save is 0.2. (i) Calculate the minimum change and state the direction of change in government spending required to completely close the output gap in the short run. Show your work. (ii) On your graph in part (a), show the short-run effect of the change in government spending in part (c)(i), labeling the new equilibrium price level PL₂. (d) Draw a correctly labeled graph of the loanable funds market, and show the effect of the change in government spending in part (c)(i) on the equilibrium real interest rate. (e) Based on the change in the real interest rate shown on your graph in part (d), what will happen to each of the following? (i) The price of previously issued bonds (ii) The rate of economic growth in the long run. Explain. Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

2. The economy of Noralandia is in short-run equilibrium with an actual inflation rate that is currently higher than the expected inflation rate. (a) Draw a correctly labeled graph of the short-run and long-run Phillips curves. Label the current short-run equilibrium point as X. (b) The banking system in Noralandia has ample reserves. Identify a specific monetary policy action that the central bank of Noralandia would take to bring the inflation rate closer to the expected inflation rate. (c) Noralandia has an open economy and a flexible exchange rate. Based solely on the effect of the monetary policy action identified in part (b) on interest rates in Noralandia, will there be an increase, a decrease, or no change in the flow of international financial capital into Noralandia? Explain. (d) Based on your answer to part (c), what will happen to the international value of Noralandia's currency? Explain. Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.

3. Assume that in the country of Zeta, the civilian noninstitutional population aged 16 and over is 1,000,000. The labor force participation rate is 70%, the unemployment rate is 9%, and the natural rate of unemployment is 5%. (a) Calculate the number of people in Zeta that are unemployed. Show your work. (b) Is the economy of Zeta currently experiencing a recessionary gap, an inflationary gap, or no output gap? Explain. (c) Consumer goods and capital goods are produced in the country of Zeta. Draw a correctly labeled graph of the production possibilities curve for Zeta. Indicate a point, labeled A, that represents the current state of Zeta's economy. (d) If some individuals who are counted as unemployed in Zeta stop looking for work, what will happen to each of the following? (i) The labor force participation rate. Explain. (ii) The unemployment rate Begin your response to this question at the top of a new page in the separate Free Response booklet and fill in the appropriate circle at the top of each page to indicate the question number.