AP Macroeconomics 2008 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 5,000 schools, colleges, universities, and other educational organizations. Each year, the College Board serves seven 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. 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. AP Central is the official online home for the AP Program: apcentral.collegeboard.com.
2008 AP MACROECONOMICS FREE-RESPONSE QUESTIONS MACROECONOMICS Section II Planning Time 10 minutes Writing Time 50 minutes 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 the United States economy is operating at full-employment output and the government has a balanced budget. A drop in consumer confidence reduces consumption spending, causing the economy to enter into a recession. (a) Using a correctly labeled graph of the short-run Phillips curve, show the effect of the decrease in consumption spending. Label the initial position A and the new position B. (b) What is the impact of the recession on the federal budget? Explain. (c) Assume that current real gross domestic product falls short of full-employment output by $500 billion and the marginal propensity to consume is 0.8. (i) Calculate the minimum increase in government spending that could bring about full employment. (ii) Assume that instead of increasing government spending, the government decides to reduce personal income taxes. Will the reduction in personal income taxes required to achieve full employment be larger than or smaller than the government spending change you calculated in part (c)(i)? Explain why. (d) Using a correctly labeled graph of the loanable funds market, show the impact of the increased government spending on the real interest rate in the economy. (e) How will the real interest rate change in part (d) affect the growth rate of the United States economy? Explain. 2. Balance of payments accounts record all of a country s international transactions during a year. (a) Two major subaccounts in the balance of payments accounts are the current account and the capital account. In which of these subaccounts will each of the following transactions be recorded? (i) A United States resident buys chocolate from Belgium. (ii) A United States manufacturer buys computer equipment from Japan. (b) How would an increase in the real income in the United States affect the United States current account balance? Explain. (c) Using a correctly labeled graph of the foreign exchange market for the United States dollar, show how an increase in United States firms direct investment in India will affect the value of the United States dollar relative to the Indian currency (the rupee). Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for students and parents). -2- GO ON TO THE NEXT PAGE.
2008 AP MACROECONOMICS FREE-RESPONSE QUESTIONS 3. The diagram above shows the production possibilities curves for two countries: Artland and Rayland. Using equal amounts of resources, Artland can produce 600 hats or 300 bicycles, whereas Rayland can produce 1,200 hats or 300 bicycles. (a) Calculate the opportunity cost of a bicycle in Artland. (b) If the two countries specialize and trade, which country will import bicycles? Explain. (c) If the terms of trade are 5 hats for 1 bicycle, would trade be advantageous for each of the following? (i) Artland (ii) Rayland (d) If productivity in Artland triples, which country has the comparative advantage in the production of hats? STOP END OF EXAM Visit apcentral.collegeboard.com (for AP professionals) and www.collegeboard.com/apstudents (for students and parents). -3-
AP Macroeconomics 2008 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 5,400 schools, colleges, universities, and other educational organizations. Each year, the College Board serves seven 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. College Board, AP Central, Advanced Placement Program, AP, 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. All other products and services may be trademarks of their respective owners. Permission to use copyrighted College Board materials may be requested online at: www.collegeboard.com/inquiry/cbpermit.html. AP Central is the online home for AP teachers: apcentral.collegeboard.com.
11 points: (2 + 2 + 2 + 3 + 2) AP MACROECONOMICS 2008 SCORING GUIDELINES (Form B) Question 1 (a) 2 points: One point is earned for stating that the aggregate demand will increase. One point is earned for recognizing that the short-run aggregate supply is not affected. (b) 2 points: One point is earned for a correctly labeled graph of aggregate demand and aggregate supply. One point is earned for showing a rightward shift of the aggregate demand curve and showing an increase in both real output and the price level.
AP MACROECONOMICS 2008 SCORING GUIDELINES (Form B) Question 1 (continued) (c) 2 points: One point is earned for a correctly labeled graph of the loanable-funds market. One point is earned for showing a rightward shift of the demand curve for funds and concluding that the real interest rate will rise. (A leftward shift of the supply curve is accepted.) (d) 3 points: One point is earned for stating that the supply of Country Z s currency will decrease. One point is earned for the explanation that the higher interest rate reduces the outflow of funds to countries that now have a relatively lower interest rate. One point is earned for concluding that the value of Country Z s currency will rise or Country Z s currency will appreciate. (e) 2 points: One point is earned for stating that Country Z s exports will decrease. One point is earned for the explanation that the appreciating currency makes Country Z s goods relatively more expensive.
AP MACROECONOMICS 2008 SCORING GUIDELINES (Form B) Question 2 7 points (3 + 3 + 1) (a) 3 points: One point is earned for stating yes for Mexican consumers. One point is earned for stating no for Mexican manufacturers. One point is earned for the explanation that reducing tariffs will cause the domestic price of automobiles to fall in Mexico, lowering the production of cars in Mexico. (b) 3 points: One point is earned for indicating that the current account will move toward a deficit. One point is earned for the explanation that the reduction in tariff increases imports relative to exports. One point is earned for stating that the capital account will move toward a surplus. (c) 1 point: One point is earned for concluding that aggregate demand will decrease.
AP MACROECONOMICS 2008 SCORING GUIDELINES (Form B) Question 3 7 points (1 + 2 + 2 + 2) (a) 1 point: One point is earned for calculating today s GDP = ($6 x 400) + ($2 x 1,000) + ($2 x 800) = $6,000. (b) 2 points: One point is earned for stating that the inflation rate is 50 percent [(150-100)/100]. One point is earned for calculating this year s real GDP = $6,000/1.5 = $4,000. (c) 2 points: One point is earned for stating that real wages would fall. One point is earned for the explanation that the wages rose by only 20 percent as compared to the inflation rate of 50 percent, causing a 30 percent fall in real wages. (d) 2 points: One point is earned for concluding that a borrower would be better off. One point is earned for the explanation that, due to the higher inflation, the borrower is paying back the loan using fewer real dollars.