AP Macroeconomics

1. Review process/hints for writing the Economics FRQ 2. Work through a sample long FRQ

 The FRQ section is 1/3 of the AP Economics exam score  There are three questions, the first of which is worth 15 points and the other two are worth 7.5 points each  Each year’s exam cut score is different… but in almost all cases, you need to score points in the FRQ to make a 3 or better

Most problems have the following components: 1.Starting point 2.Pivotal event 3.Initial effects 4.Secondary or Long-Run effects

1. Starting point Assume the U.S. economy is currently operating at an aggregate output level above potential output. Draw a correctly labeled graph showing aggregate demand, short-run aggregate supply, long-run aggregate supply, equilibrium output, and the aggregate price level.

2. Pivotal event Now assume that the Federal Reserve conducts contractionary monetary policy. Identify the open-market operation the Fed would conduct.

3. Initial effects Draw a correctly labeled graph of the money market to show the effect of the monetary policy on the nominal interest rate. Show and explain how the Fed’s actions will affect equilibrium in the aggregate demand and supply graph you drew previously. Indicate the new aggregate price level on your graph.

4. Secondary or Long-Run effects Assume Canada is the largest trading partner of the U.S. Draw a correctly labeled graph of the foreign exchange market for the U.S. dollar showing how the change in the aggregate price level you indicated on your graph above will affect the foreign exchange market. What will happen to the value of the U.S. dollar relative to the Canadian dollar? How will the Federal Reserve’s contractionary monetary policy affect the real interest rate in the United States? Explain.

 Respond clearly and concisely  Skip lines between each part of the question – and clearly label which part you’re answering  Address the verb of the prompt appropriately ◦ “SHOW” means to model/graph with CORRECT LABELS ◦ “EXPLAIN” means to provide the reasoning (providing a formula or graph, or interpreting one) ◦ “IDENTIFY” means providing the answer(s) asked for ◦ “CALCULATE” means to show the mathematical means for determining an answer

 Show your work – including the formula  Review your answer when you’re done to make sure it follows from the prompt, and that models and math are correct

A. On the Aggregate Model, show an economy in recession. i.Which group may enact countercyclical fiscal policy? ii.What can this group change?

B. Show the effect of fiscal policy on the aggregate model. i.What is the result of these policies in terms of the federal budget?

C. How does this fiscal policy impact the money market? i.Show the change on a Money Market graph and its effect on interest rates. D. How will the federal budget balance impact the Loanable Fund market? i.Show this change and its effect on interest rates.

E. Depict the impact of Money Market and Loanable Funds changes on the Investment Demand graph. i.What is the name for this effect, and how will it impact the Aggregate Model?

F. Show the effect of higher US interest rates in the Loanable Funds market as a result of capital flows. G. Graph this change in the Dollar Market. i.How will this affect the value of the dollar, as well as US exports? ii.What is the overall effect on net exports and the United States’ GDP?