1. 2005
AP Macroeconomics
Question 1

2. (i) Output Level (ii) Price Level
Assume that the United States economy is currently in equilibrium at the full-employment level of real gross domestic product.
(i) Output Level
(ii) Price Level E1

3. Japan is a major importer of United States
products. Assume that the Japanese economy
goes into a recession.
Explain the impact of the Japanese recession
on the U.S. equilibrium output and price
level.
Exports to Japan Decrease:
NX ↓ => AD ↓ => R-GDP ↓ E1
AD2

4. Buy Gov’t Bonds (c ) Assume that the Federal Reserve takes action i1
to curb the effects of the Japanese recession
on the U.S. economy.
What open-market operation would the
Federal Reserve undertake?
Buy Gov’t Bonds
Money Market
MS1
MS2
Nominal
Interest
Rate i1 i2 MD Q1 Q2
Qty $

5. Explain how the change in the nominal interest
rate in part (c ) (ii) will affect aggregate demand
price level, and real output in the U.S.
When nominal interest rates drop =>
Investment ↑ (I) & Consumption ↑ (C) =>
Therefore AD ↑

6. (d) Define the real interest rate.
real rate = nominal rate – expected
inflation

7. Indicate the effect of the open-market operation
you identified in part (c ) (i) on the real interest
rate in the United States.
When the nominal rate is going down and
the inflation rate is going up (AD shift), then
the real rate must go down.
Formula: real rate = nominal – expected
inflation