AP1995 Macroeconomics RE

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Scoring Guide w ithM u tip leChoice S ection


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College Board Regional OfficesMiddle StatesMary Alice Gilligan/John DiamondSuite 410,3440 Market Street, Philadelphia. Pennsylvania 19104-3338215/387-7600MidwestRobert McDonoughlPaula HerronSuite 401, 1800 Sherman Avenue, Evanston. Illinois 60201-3715708/866-1700New EnglandFred Wetzel470 Totten Pond Road, Waltham, Massachusetts 02154-1982617/890-9150SouthGeoffrey Freer/Tom NewSuite 250, 2970 Clairmont Road, Atlanta, Georgia 30329-1639404/636-9465SouthwestPaul WilliamsonlFrances BrownSuite 400, 701 Brazos Street, Austin, Texas 78701-4039512/472-0231WestLindy Daters/Claire PeltonSuite 480, 2099 Gateway Place, San Jose, California 95110-1017408/452-1400AP Consultant in CanadaGeorge Ewonus212-1755 Springfield Road, Kelowna, B.C., Canada VI Y 5V5604/861-9050 and800/667-4548 (in Canada only)

National Office Wade Curry, Phll Arbolino, Charlotte Eielson .45 Columbus Avenue New York, NY 100236992 2121713-8000


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The Advanced Placement Examination inMacroeconomics The Entire 1995 Examination and Answer Key

Sample Student Responses Statistical Information


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This booklet was produced by Educational Testing Service (ETS), which develops and administers the examinations of theAdvanced Placement Program for the College Board. Permission is hereby granted to any nonprofit organization or institutionto reproduce this booklet in limited quantities for its own use, but not for sale, provided that the copyright notices are retainedin all reproduced copies exactly as they appear in this booklet. This permission does not apply to any third-party copyrightedmaterial that may be in this booklet.The College Board and Educational Testing Service (ETS) are dedicated to the principle of equal opportunity, and theirprograms, services, and employment policies are guided by that principle.The College Board is a national nonprofit association that champions educational excellence for all students through theongoing collaboration of nearly 2,900 member schools, colleges, universities, education systems, and organizations. TheBoard promotes - by means of responsive forums, research, programs, and policy development - universal access to highstandards of learning, equity of opportunity, and sufficient financial support so that every student is prepared for success incollege and work.

THE COLLEGE BOARD: EDUCATIONAL EXCELLENCE FOR ALL STUDENTSCopyright 1995 by College Entrance Examination Board and Educational Testing Service. All rights reserved.

College Board, Advanced Placement Program, AP, College Explorer, and the acorn logoare registered trademarks of the College Entrance Examination Board.


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ContentsWelcome from the Advanced Placement ProgramI. IntroductionDeveloping the Macroeconomics Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Grading Standards ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Examination Standards 3Student Preparation 3

v

II. The 1995 AP Macroeconomics ExaminationOverview...................................................................... 5The Released Exam :. . . . . . . . . . . . . . 5

Instructions for Administering the Exam (from the 1995 Coordinator's Manual) . . . . . . . . . . . 7Section I: Multiple-Choice 9Section II: Free-Response 23

m. Answers to the 1995 AP Macroeconomics ExaminationSection I: Multiple-Choice 27

Sample Answer Sheet 28Section II: Free-Response

The Development of Free-Response Questions 29Setting and Maintaining Standards 29The Reading '. . . . . . .. 30General Comments 30Free-Response Question 1 32Free-Response Question 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 48Free-Response Question 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 55

IV. Statistical InformationSection IIScores 61How the AP Grades inMacroeconomics Were Determined 62Section I Scores and AP Grades 63Reliability of Classification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 64College Comparability Studies 64Reminders for All Grade Report Recipients 64Reports on AP Grades 65Purpose of AP Grades 65

Participants in the Creation and Scoring of the Exam 67AP Publications Order Form 69


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Welcome from tile Advanced Placement ProgramThe Advanced Placement Program is now 40 years old! Since its creation by the College Board in 1955, it hasoffered more than seven million examinations to more than five million candidates around the world. Thesecandidates are usually high school juniors or seniors who have taken an AP or equivalent college-level course whilestill in secondary school.

Students participate in the AP Program for several reasons. Some enjoy the opportunity to be challengedacademically while still in high school. Others appreciate the chance to be exempt from the introductory level of acourse once in college. Whatever the reason, participation in the AP Program provides an academically stimulatingsituation; it can also save a student money and time in college.

The validity and reliability of the AP Program are widely acknowledged. AP grades are now recognized bymore than 3,100 two- and four-year colleges and universities in and outside the United States. These institutionsoffer advanced placement, course credit, or both to students who have successfully completed AP Exams. Inaddition, almost 1,500 of these institutions grant sophomore standing to students who have demonstrated theircompetence in three or more exams.

The AP Program is more than just examinations, however. It also actively promotes college-level instructionat the high school level, specifically in the form ofAP courses, faculty workshops, and associated publications. TheCollege Board periodically monitors college-level courses throughout the nation to ensure thatAP courses reflectthe best college instruction. Every summer the Board holds workshops for AP teachers from the more than 10,000high schools that offer AP courses and examinations. Finally, the Board has made available almost 300 publica-tions describing the Program's products and services.

Inthis publication we present to you the 1995AP Macroeconomics Examination and its scoring standards. Wehave found that one of the best ways to become familiar with AP-Ievel material and to optimize preparation for anAP Exam is to see what has appeared on prior exams, how students responded to the questions, and why the facultyconsultants scored those responses the way they did. We hope this publication will be useful to you, and we wishyou the best of luck.

Walt MacDonaldDirectorAdvanced Placement Program


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Chapter IIntroduction

The Advanced Placement Program of the CollegeBoard aims to improve the nation's quality of educa-tion and to facilitate students' transition from second-ary school to college. Through its committees of edu-cators, the AP Program provides course descriptionsand examinations in 16 disciplines so that secondaryschools may offer their students the stimulating chal-lenge of college-level study culminating in an examthat measures college-level achievement. Many of theexaminations cover the equivalent of a full-year collegecourse. However, the AP Macroeconomics Examina-tion is based on a one-semester college course, and somost students taking the AP Macroeconomics Exami-nation have had a one-semester course in preparation. DEVELOPING THEMACROECONOMICS EXAMAt least two years are generally needed to developeach Advanced Placement Examination. In the case ofmacroeconomics, the process starts when the CollegeBoard, working with test development specialists atEducational Testing Service (ETS), appoints an APEconomics Development Committee composed of sixteachers from secondary schools, colleges, and uni-versities in different parts of the country. This com-mittee is responsible for developing both the APMicroeconomics and AP Macroeconomics Examina-tions. Committee members typically serve for a periodof three years; the chief faculty consultant in econom-ics serves ex officio on the committee and attends allmeetings.The test development process begins with commit-

tee members - as well as other college professors -independently writing questions for both the multiple-choice and free-response sections of the examination.The questions are collected and reviewed by ETS testspecialists.The multiple-choice questions are then assembled

into draft "pretests" by ETS specialists for review bycommittee members during one of the two or threecommittee meetings which occur during the year.

These pretests closely match the composition of Sec-tion I of an actual AP Macroeconomics Examination.Following committee review and revisions, the pre-tests are administered to students in introductorymacroeconomics courses at colleges and universitiesacross the United States. The pretests are scored atETS and each question is categorized by its level ofdifficulty and how well it discriminated between more-able and less-able students.Using questions from a number of pretests, ETStest specialists assemble draft Section I examinations

which are reviewed and revised at future committeemeetings. The level of difficulty of the examinations iscontrolled by selecting a variety of questions at differ-ent levels of difficulty, and by embedding equatingitems in each test that have appeared in an earlier formof the examination.Questions appearing in Section II of the examina-

tion follow a different development path. ETS testspecialists prepare pools of draft questions; the APEconomics Development Committee selects sets offree-response questions well in advance of theiradministration, and the committee reviews and revisesthem periodically to ensure that they are of the highestpossible quality when they are eventually administered.In the last stage of development, committee memobers give final approval on all multiple-choice andfree-response questions when the questions are in"camera-ready" form. This takes place several monthsprior to the administration of the examination.Regardless of type, each question appearing on the

AP Macroeconomics Examination has undergone care-ful consideration regarding its appropriateness, levelof difficulty, and ability to distinguish gradations ofachievement. The committee members who areAdvanced Placement high school teachers offer valu-able advice regarding realistic expectations when mat-ters relating to coverage of material, knowledge ofterms, and clarity of phrasing are addressed. The col-lege and university faculty members contribute theirown perspectives, ensuring that the questions that areapproved and accepted are at the appropriate level of


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difficulty for an introductory college course inMacroeconomics. The chief faculty consultant consid-ers difficulties that might interfere with reliable scor-ing of a free-response question. In addition, ETSconsultants provide advice and guidance.

GRADING STANDARDSGrading AP Examinations is a unique enterprise: thesize and complexity of the Reading are on a scaleunlike any other essay assessment in this country; theevaluation requires special and demanding proceduresdesigned to produce equitable and consistent evalua-tions of performance. While the multiple-choice sec-tions of the exams are scored by computer, the free-response sections require the involvement of about3,400 college professors and AP teachers who havebeen carefully selected on the basis of their education,experience, and association with the AP Program. Sev-eral hundred thousand examinations containing morethan three million student answers are evaluated. Inaddition, several hundred individuals provide profes-sional and clerical support at the three or more sitesthat are required to accommodate the six-day Reading.While pride in accomplishing this huge task is justi-

fiable, the essential concern of the Advanced Place-ment Program is that all students receive grades thatdemonstrate their achievement fairly and accurately.Thus, the following procedures are used to ensure thatgrading standards are applied fairly to all papers. The conscientious development of scoringstandards. The preparation of standards for anexamination begins when the Development Commit-tee reviews and approves the examination, which maybe as much as two years before the Reading. After theexam has been administered, the standards are refinedby faculty consultants who have experience workingwith actual candidate answers. The use ofcarefully developed scoring scales.Each question has an associated scoring scale designedto allow faculty consultants tomake distinctions amonganswers. The scales - from 0 to 9 or 0 to 5 - avoidthe problem of too few points, which allows onlycoarse distinctions, and the problem of too many points,which requires overly refined, often meaningless dis-

criminations. Because the standards and their accom-panying scales are tailored to individual questions,they allow each answer to be appropriately ranked. The rigorous review of the scoring standardsand their internalization by all AP faculty con-sultants. Three to seven hours of the six-day Readingperiod are devoted to reviewing the standards andmaking sure that they are applied consistently. Theobjective is to meld two essential components: (1)each faculty consultant's professional assessment ofthe answers, and (2) the scoring standards developedby the Reading group. In this way, an accurate anduniform assessment of student responses is achieved. Minimization of the possibility of the ''haloeffect." The "halo effect" (giving an answer a higheror lower grade than it deserves because of good orpoor impressions of other answers by the same stu-dent) is minimized by following three practices:(1) having each question read by a different facultyconsultant, (2) completely masking all scores givenby other faculty consultants, and (3) covering the candi-date's identification information. Using these practicespermits each faculty consultant to evaluate essayanswers without being prejudiced by knowledge aboutindividual candidates. Having three faculty consultantsassess different questions within a given exam ensuresthat each answer is judged solely on its own merit. The close monitoring of scoring standards.Scoring standards are developed and monitored usinga variety of methods that minimize the chances thatstudents would receive different grades if their answerswere read by different faculty consultants. One methodis to have a second faculty consultant independentlyscore exams that have been previously read; another isto have the faculty consultant reread exams that he orshe has previously read. In either instance, if the dis-parity between the resulting scores is too great, theindividuals involved resolve the differences. These arejust two of the methods used to maintain the scoringstandards. Taken as a whole, the procedures ensurethat each candidate receives an accurate estimate ofher or his. demonstrated achievement on the APExamination.


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EXAMINATION STANDARDSThe AP Exam in Macroeconomics contains a 70-minute multiple-choice section, and a 50-minute free-response section. The inclusion of both types of ques-tion ensures that the full range of a student's abilitiesis evaluated.Multiple-choice questions have the unique ability

to cover the breadth of a curriculum. They have threeother strengths: high reliability, controlled level ofdifficulty, and the possibility of establishing compara-bility with earlier examinations. Reliability, or thelikelihood that candidates taking a different form ofthe examination will receive the same scores, is con-trolled more effectively with multiple-choice ques-tions than with free-response questions.Maintaining a specified distribution of multiple-

choice questions at appropriate levels of difficultyensures that the measurement of differences in stu:"dents' achievement is optimized. For AP Examina-tions, the most important distinctions among studentsare between the grades of 2 and 3, and 3 and 4. Thesedistinctions are usually best accomplished by usingmany questions of middle difficulty.

Comparability of scores on the multiple-choice sec-tions of a current and a previous examination is pro-vided by incorporating a given number of items froman earlier examination within the current one, therebyallowing comparisons to be made between the scoresof the earlier group of candidates and the currentgroup. This information is used, along with other data,by the chief faculty consultant to establish AP gradesthat reflect the competence demanded by the AdvancedPlacement Program and that compare with earliergrades.An AP Macroeconomics Examination would not,

however, be able to evaluate the full range of a student'sabilities without the use of free-response questions.Multiple-choice questions can measure a student'sknowledge of facts, concepts, theories of macro-economics, and even an understanding of typicalgraphs, measuring a student's ability to use macro-economics tools learned in the classroom to solveproblems in the economy. To explain the relationshipbetween different economic components, and to useanalytic and organizational skills, however, the free-response format provides better assessment of thestudent's ability.In the free-response section of the Macroeconomics

Examination, candidates are required to answer threequestions. In the first question the candidates are gen-.erally required to interrelate different content areas, to

analyze a given economic situation, and to set forthand evaluate general macroeconomic policies. Thesecond two questions tend to be more limited to onecontent area and focus on one or two macroeconomicconcepts. In all cases students should be encouragedto use graphical analysis wherever possible. (Begin-ning with the 1996 examinations, students may berequired in some questions to use graphical analysis inanswering the question.) Students are expected, in thissection, to explain why things happen or to explain thetransition mechanism, rather than to simply assert thatsomething does happen.The free-response and multiple-choice sections are

designed to complement each other and to meet theoverall course objectives and examination specifica-tions. The questions in each section are analyzed bothindividually and collectively after each administra-tion, and the conclusions are used to improve theexamination for the next administration. STUDENT PREPARATIONSince the AP Macroeconomics curriculum mirrors atypical one-semester college-level introductory class,students should use an appropriate college-level text.They should develop and apply critical thinking skillswith a strong emphasis on cause-effect relationships.They should also be able to analyze data and to usegraphs to demonstrate basic concepts and to supportsophisticated economic reasoning. Teachers can helpstudents develop these skills by having them writeanswers to free-response questions and give oral pre-sentations that require the students to apply macro-economic concepts to problems - both real worldand hypothetical - and to participate in debates onconflicting theories. Requiring the inclusion of andthe explanation for appropriate economic models helpsstudents distinguish between the various models ofmacroeconomic theory. When using a graph to helpanswer a question or evaluate an economic problem,students should use the appropriate graph, label itcorrectly, and indicate clearly any shifts in the curvesthat may occur as a result of either changes in theeconomy or their recommendations. For both the longand short free-response questions, it is important thatstudents read the questions carefully and take a fewminutes to briefly outline their response to the ques-tion, making sure they have covered all of pointsasked for in the question.Samples of student writing for the AP Macroeco-

nomics Examination, the guides used by faculty con-sultants to evaluate such writing, and rationales for the


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scores each short answer or essay received, are avail-able in the published examinations for APMacroeconomics, such as the one included here (1995)and the one published in The 1990 Advanced Place-ment Examinations in Economics and Their Grading.The multiple-choice questions from the 1995 and 1990AP Microeconomics Exams are also included in thesepublications. Inaddition, sample multiple-choice andessay questions are published each year intheAdvancedPlacement Course Description in Economics. The free-response section of the examination is released eachyear after the examination has been given.

Other materials available for teachers of APMacroeconomics courses include: the Teacher's Guideto AP Courses in Macroeconomics, which givesresource information for teaching an Advanced Place-ment course, including sample high school and collegecurriculums and extensive bibliographies; and copiesof the 1990 and 1995 AP Macroeconomics Examina-tions in sets of 10 for classroom use.To order any of these items, or to order more copies

of this publication, please use the order form at theback of this booklet.


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Chapter IIThe 1995 AP Macroeconomics Examination

OVERVIEWThis booklet contains the entire 1995 AP Macro-economics examination: Section I (multiple-choice)and Section II (free-response). The format of thisyear's. examination is identical to the format intro-duced in 1993.The first section contains 60 multiple-choice ques-

tions covering the following content areas: basic eco-nomic concepts, measurement of economic perfor-mance, national income and price determination, andinternational economics and growth. Most of the mul-tiple-choice questions are designed to challenge astudent's analytical ability rather than to test simplefactual recall, although basic economic literacy ques-tions may be included as appropriate based upon thecontent of the examination. The multiple-choice por-tion of the examination counts for two-thirds of thetotal grade.The second section of the examination (which con-

tributes one-third of the total examination score) con-tains three mandatory questions. The first questioncounts for 50 percent of the Section II score. Each ofthe other two questions accounts for 25 percent of theSection II score.

Chapter illincludes the scoring guides that thefaculty consultants used to grade the 1995 essays, aswell as sample student responses representing differ-ent scores on the grading scales.

THE RELEASED EXAMPages 7 and 8 contain the instructions, as printed in the1995 Coordinator's Manual, for administering the APMacroeconomics Examination. Following the instruc-tions is a copy of the actual 1995 AP MacroeconomicsExamination. Ifyou wish to use this exam to test yourstudents, you may use these instructions to create anexam environment that resembles a nationaladministration.Read aloud the directions that are shaded and set in

boldface. All other instructions are for the personadministering the test and need not be read aloud. Youwill find that some instructions - such as those refer-ring to the date, the time, and page numbers - are nolonger relevant; please ignore them.


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INSTRUCTIONS FORADMINISTERING THE EXAM(from the 1995 Coordinator's Manual)After completing the general instructions that begin onpage 27, say:

Answer all questions regarding procedure. Set yourwatch at 7:59. When it reads exactly 8:00, say:

While the candidates are working on Section I, you andyour proctors should make sure that they are markinganswers on their answer sheets in pencil and are notlooking at their Section II booklets.-AT9:10-

MACROECONOMICS EXAMINATION

After you have collected an answer sheet from everycandidate, say:

Collect the sealed Section I exam booklets. Afteryou have collected a sealed booklet from every can-didate, say:


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MACROECONOMICS EXAMINATIONAnswer all questions regarding procedure. Then say:

Collect the Candidate Packs. Then say:

Answer all questions regarding procedure. Then say:

Answer all questions regarding procedure. (Underlinedinstructions should not be read aloud during a lateadministration.) Set your watch at 9:09. When it readsexactly 9:10, say:

You and your proctors should check to be sure that allcandidates are writing their answers in tlle Section IIbooklets.

-AT10:00-

Collect the Section ITbooklets. Be sure you have onefrom every candidate, and check the back of each book-let to see that the candidate's AP number appears in thetwo boxes. Students may keep the inserts. When all theexam materials have been collected, you may dismissthe candidates.Fill in the necessary information for the Macro-

economics Examination on the appropriate S&R Form.Alternate exams for late administration should be re-corded only on the S&R Form for alternate exams.Then put the exam materials in locked storage until theyare returned to ETS in one shipment after your school'slast administration. See ''Activities After the Exam."


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1995

MACROECONOMICSTwo hours are allotted for this examination: 1 hour and 10 minutes for Section I, which consists ofmultiple-choice questions; and 50 minutes for Section II,which consists of three mandatory essayquestions. Section I is printed in this examination booklet. Section II is printed in a separate booklet.

SECTION ITime-l hour and 10 minutesNumber of questions-60

Percent of total grade-66 2/3Section I of this examination contains 60 multiple-choice questions. Therefore, please be careful tofill in only the ovals that are preceded by numbers 1 to 60 on your answer sheet.

General InstructionsDO NOT OPEN THIS BOOKLET UNTIL YOU ARE INSTRUCTED TO DO SO.INDICATE ALL YOUR ANSWERS TO QUESTIONS IN SECTION ION THE SEPARATEANSWER SHEET. No credit will be given for anything written in this examination booklet, but youmay use the booklet for notes or scratchwork. After you have decided which of the suggested answersis best, COMPLETELY fill in the corresponding oval on the answer sheet. Give only one answer toeach question. If you change an answer, be sure that the previous mark is erased completely.

Example:Chicago is a(A) state(B) city(C) country(D) continent(E) village

Sample Answer

Many candidates wonder whether or not to guess the answers to questions about which they are notcertain. In this section of the examination, as a correction for haphazard guessing, one-fourth of thenumber of questions you answer incorrectly will be subtracted from the number of questions youanswer correctly. It is improbable, therefore, that mere guessing will improve your score significantly;it may even lower your score, and it does take time. If, however, you are not sure of the correctanswer but have some knowledge of the question and are able to eliminate one or more of the answerchoices as wrong, your chance of getting the right answer is improved, and it may be to youradvantage to answer such a question.Use your time effectively, working as rapidly as you can without losing accuracy. Do not spend toomuch time on questions that are too difficult. Go on to other questions and come back to the difficultones later if you have time. It is not expected that everyone will be able to answer all the multiple-choice questions.

Copyright 1995 by College Entrance Examination Board and Educational Testing Service. All rights reserved.Certain test materials are Copyrighted solely in the name of ETS.


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MACROECONOMICSSECTION I

Time - 70 minutes60 Questions

Directions: Each of the questions or incomplete statements below is followed by five suggested answers or comple-tions. Select the one that is best in each case and then fill in the corresponding oval on the answer sheet.

4. What would be the effect of a large increase inlabor productivity on the real gross domesticproduct and the price level?

Real Gross

STEEL

Domestic Product Price Level(A) Increase Increase(B) Increase Decrease(C) No effect Increase(D) Decrease Increase(E) Decrease Decrease. Which of the following would cause the produc-tion possibilities curve shown above to shiftoutward?

(A) Reopening steel plants that had been closed(B) Rehiring laid-off steelworkers(C) Using machinery for missile production

instead of steel production(D) Using machinery for steel production insteadof missile production(E) Developing a more efficient steelmaking

process

5. An increase in which of the following willincrease the value of the spending multiplier?(A) The supply of money(B) Equilibrium output(C) Personal income tax rates(D) The marginal propensity to consume(E) The required reserve ratio

2. If in a specified year nominal gross domesticproduct grew by 11 percent and real grossdomestic product grew by 4 percent, inflationfor this year would be(A) -7%(B) 7%(C) 8%(D) 11%(E) 15%

6. According to the Keynesian model, which of thefollowing would increase aggregate demand?(A) An increase in autonomous investment(B) An increase in the discount rate(C) A decrease in unemployment compensation

payments(D) A decrease ingovernment expenditures

accompanied by an equal reduction in taxes(E) A decrease in government expenditures onpublic works

3. Which of the following is an example of struc-tural unemployment?(A) A computer programmer who leaves her job

to move to Florida(B) A worker who loses his job during a recession(C) An autoworker who is replaced by a robot(D) A construction worker who is alwaysunemployed during the winter months(E) A worker who is engaged in unproductive

work


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300200

Consumption + Investment +Government ExpendituresConsumption + Investment

g JUJO: :E-:;;)


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8. Commercial banks can create money by(A) transferring depositors' accounts at the

Federal Reserve for conversion to cash(B) buying Treasury bills from the Federal

Reserve(C) sending vault cash to the Federal Reserve(D) maintaining a 100 percent reserve require-ment(E) lending excess reserves to customers

9. If the reserve requirement is 20 percent, the exis-tence of $100 worth of excess reserves in thebanking system can lead to a maximum expan-sion of the money supply equal to(A) $20(B) $100(C) $300(D) $500(E) $750

10. If the Federal Reserve lowers the reserve require-ment, which of the following would most likelyoccur?(A) Imports will rise, decreasing the trade deficit.(B) The rate of saving will increase.(C) Unemployment and inflation will both

increase.(0) Businesses will purchase more factories andequipment.

(E) The budget deficit will increase.11. If the public's desire to hold money as currency

increases, what will the impact be on the bankingsystem?(A) Banks would be more able to reduce unem-

ployment.(B) Banks would be more able to decrease aggre-

gate supply.(C) Banks would be less able to decrease aggre-gate supply.(D) Banks would be more able to expand credit.(E) Banks would be less able to expand credit.


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12. According to Keynesian theory. decreasing taxes and increasinggovernment spending will most likely change consumptionexpenditures and unemployment in which of the following ways?

ConsumQtion EXQenditures UnemQloyment(A) Decrease Increase(B) Decrease No change(C) Increase Decrease(D) Increase Increase(E) No change Decrease

13. Which of the following policy combinations is most likely to cure asevere recession?

OQen-Market OQerations Taxes Government SQending(A) Buy securities Increase Decrease(B) Buy securities Decrease Increase(C) Buy securities Decrease Decrease(D) Sell securities Decrease Decrease(E) Sell securities Increase Increase

. 1 3 .


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14. In an economy at full employment, a presidentialcandidate proposes cutting the government debtin half in four years by increasing income taxrates and reducing government expenditures.According to Keynesian theory, implementationof these policies is most likely to increase(A) unemployment(B) consumer prices(C) aggregate demand(0) aggregate supply(E) the rate of economic growth

15. To protect high-cost domestic producers, acountry imposes a tariff on an imported com-modity, Y. Which of the following is most likelyto occur in the short run?I. A decrease in domestic production of YIT. An increase in domestic production of Yill.An increase in foreign output of Y

(A) I only(B) II only(C) illonly(0) I and illonly(E) II and illonly

16. Suppose two countries are each capable of indi-vidually producing two given commodities.Instead, each specializes by producing the com-modity for which it has a comparative advantageand then trades with the other country. Which ofthe following is most likely to result?(A) The two countries will become more inde-

pendent of each other.(B) Unemployment will increase in one country

and decrease in the other.(C) There will be more efficient production inone country but less efficient production inthe other.(0) Both countries will become better off.(E) Both countries will be producing their com-

modity inefficiently.

17. Which of the following means of reducing mili-tary spending would have the greatest positiveimpact on gross domestic product for the UnitedStates?(A) Combining two domestic military bases into

one overseas base(B) Cutting retirement benefits to military per-sonnel(C) Closing overseas military bases and relocatingthose operations to the United States(0) Closing overseas military bases and laying off

military personnel(E) Canceling contracts with domestic producersfor new airplanes

Aggregate Supply

AggregateDemandGROSS DOMESTIC PRODUCT

18. According to the graph above, which of thefollowing will necessarily result in a decrease inoutput?I. A rightward shift of the aggregate demandcurveIT. A leftward shift of the aggregate demandcurveill.A rightward shift of the aggregate supplycurveIV. A leftward shift of the aggregate supplycurve

(A) I only(B) illonly(C) I and illonly(0) ITand illonly(E) ITand IV only


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19. Which of the following will result in the greatestincrease in aggregate demand?(A) A $100 increase in taxes(B) A $100 decrease in taxes(C) A $100 increase in government expenditures(D) A $100 increase in government expenditures,coupled with a $100 increase in taxes(E) A $100 increase in government expenditures,

coupled with a $100 decrease in taxes20. If the economy is in a severe recession, which ofthe following is the fiscal policy most effective

in stimulating production?(A) Government spending increases.(B) Government spending decreases.(C) Personal income taxes are increased.(D) The Federal Reserve sells bonds on the open

market.(E) The Federal Reserve buys bonds on theopen market.

. 1 5 .

Questions 21-22 refer to the diagram below, whichdepicts an economy's consumption function.

I Consumption21. If the marginal propensity to consume increases,

the equilibrium levels of income and consumptionwill change in which of the following ways?Equilibrium Level Equilibrium Levelof Income of Consumption

(A) No change No change(B) No change Increase(C) Increase No change(D) Increase Increase(E) Decrease Decrease

22. If private investment of $100 is added to theeconomy, the equilibrium levels of income andconsumption will change in which of thefollowing ways?

Equilibrium Level Equilibrium Levelof Income of Consumption(A) Increase(B) Increase(C) Increase(D) No change(E) No change

DecreaseIncreaseNo changeIncreaseNo change


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23. The real value of the United States dollar isdetermined by(A) federal regulations regarding purchasing

power(B) the value of the gold backing the dollar(C) the goods and services it will buy(D) the money multiplier(E) the marginal propensity to consume

24. The demand for money increases when nationalincome increases because(A) spending on goods and services increases(B) interest rates increase(C) the budget deficit increases(D) the money supply increases(E) the public becomes more optimistic about

the future25. An aggregate supply curve may be horizontal

over some range because within that range(A) a higher price level leads to higher interest

rates, which reduce the money supply andconsumer spending

(B) changes in the aggregate price level do notinduce substitution

(C) output cannot be increased unless prices andinterest rates increase

(D) rigid prices prevent employment from fluc-tuating(E) resources are underemployed and an increasein demand will be satisfied without anypressure on the price level

26. If the Federal Reserve wishes to use monetarypolicy to reinforce Congress' fiscal policychanges, it should(A) increase the money supply when government

spending is increased(B) increase the money supply when governmentspending is decreased(C) decrease the money supply when governmentspending is increased

(D) increase interest rates when governmentspending is increased(E) decrease interest rates when governmentspending is decreased

27. Which of the following relationships is illustratedby a short-run Phillips curve?(A) A decrease in the rate of inflation is

accompanied by an increase in the rate ofeconomic growth,(B) A decrease in the rate of inflation isaccompanied by an increase in the rate ofunemployment.(C) An increase in the rate of inflation isaccompanied by a decrease in the rate ofeconomic growth. .

(D) An increase in the rate of inflation isaccompanied by an increase in the rate ofunemployment.

(E) A decrease in the rate of economic growth isaccompanied by a decrease in the rate ofunemployment.

28. Which of the following could cause simultaneousincreases in inflation and unemployment?(A) A decrease in government spending(B) A decrease in the money supply(C) A decrease in the velocity of money(D) An increase in inflationary expectations(E) An increase in the overall level of

productivity29. If other things are held constant, an increase in

United States imports will(A) tend to cause the dollar to appreciate becausethe world supply of dollars will rise(B) tend to cause the dollar to appreciate because

the world demand for dollars will rise(C) have no effect on the exchange rate for thedollar because exports will also increase(D) tend to cause the dollar to depreciate becausethe world supply of dollars will rise(E) tend to cause the dollar to depreciate becausethe world demand for dollars will rise

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30. An increase in which of the following is mostlikely to cause an improvement in the standardof living over time?(A) Size of the population(B) Size of the labor force(C) Number of banks(D) Level of taxation(E) Productivity of labor

31. The long-run aggregate supply curve is likely toshift to the right when there is(A) an increase in the cost of productive

resources(B) an increase in productivity(C) an increase in the federal budget deficit(D) a decrease in the money supply(E) a decrease in the labor force

32. The consumer price index measures which of thefollowing?(A) The change over time of the weighted prices

of a particular group of goods and services(B) The change over time of the weighted

wholesale price index(C) The change over time of the difference

between the gross domestic productdeflator and the wholesale price index(D) Inflation corrected for changes in the realgross domestic product

(E) Inflation corrected for changes in thewholesale price index

33. Which of the following is true if the economy isproducing at the full-employment level ofoutput?(A) The unemployment rate is zero.(B) No person is receiving unemployment

compensation from the government.(C) There is frictional unemployment.(D) The government's budget is balanced.(E) The balance of trade is in equilibrium.

34. Which of the following is a basic tenet ofclassical economic analysis?(A) Saving is usually greater than investment.(B) The economy is self-correcting to full

employment.(C) The economy may be in equilibrium at less

than full employment.(D) Inflation is not a serious economic problem.(E) The prices of products tend to be inflexible.

35. Which of the following will most likely resultfrom a decrease in government spending?(A) An increase in output(B) An increase in the price level(C) An increase in employment(D) A decrease in aggregate supply(E) A decrease in aggregate demand

36. Current equilibrium output equals $2,500,000,potential output equals $2,600,000, and themarginal propensity to consume equals 0.75~Under these 'conditions, a Keynesian economistis most likely to recommend(A) decreasing taxes by $25,000(B) decreasing taxes by $100,000(C) increasing government spending by $25,000(D) increasing government spending by $33,333(E) increasing government spending by $100,000

37. An inflationary gap could be reduced by(A) an increase in government spending(B) an increase in the supply of money(C) an increase in the income tax rate(D) a decrease in the discount rate(E) a decrease in the reserve requirement


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38. The circular flow of economic activity betweenconsumers and producers includes which of thefollowing?

I. Households buy factor services from firms.II. Households sell factor services to firms.III. Households buy outputs from firms.IV. Households sell outputs to firms.

(A) III only(B) IV only(C) I and II only(D) II and III only(E) III and IV only

39. Suppose the required reserve ratio is 20 percentand a single bank with no excess reservesreceives a $100 deposit from a new customer.The bank now has excess reserves equal to(A) $20(B) $80(C) $100(D) $400(E) $500

40. Which of the following is most likely to increaseif the public decides to increase its holdings ofcurrency?(A) The interest rate(B) The price level(C) Disposable personal income(D) Employment(E) The reserve requirement

41. During a mild recession, if policymakers want toreduce unemployment by increasing investment,which of the following policies would be mostappropriate?(A) Equal increases in government expenditure

and taxes(B) An increase in government expenditure only(C) An increase in transfer payments(D) An increase in the reserve requirement(E) Purchase of government securities by theFederal Reserve

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42. Which of the following monetary and fiscal policy combinations would mostlikely result in a decrease in aggregate demand?

Discount Rate OQen-Market OQerations Government SQending(A) Lower Buy bonds Increase(B) Lower Buy bonds Decrease(C) Raise Sell bonds Increase(D) Raise Buy bonds Increase(E) Raise Sell bonds Decrease

43. Which of the following is true of supply shocks?(A) They tend to change both relative prices and the general price level in the

economy.(B) They affect only the general price level.(C) They can be anticipated and offset with appropriate fiscal policy.(D) They can be anticipated and offset with appropriate monetary policy.(E) They make the aggregate supply curve vertical.

44. Suppose that, from 1985 to 1986, unemployment fell from 7.2 to 7.0 percentand inflation fell from 3.8 to 1.1 percent. An explanation of these changesmight be that the(A) aggregate demand curve shifted to the left(B) aggregate demand curve shifted to the right(C) aggregate supply curve shifted to the left(0) aggregate supply curve shifted to the right(E) short-run Phillips curve shifted to the right


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45. If higher United States interest rates cause foreigndemand for the dollar to increase, which of thefollowing will occur to the international value ofthe dollar and to United States exports?

International Valueof the Dollar EX:Qorts

(A) Increase Increase(B) Increase Decrease(C) Increase No change(D) Decrease Increase(E) Decrease Decrease

46. The table below indicates the number of laborhours required in Countries X and Y to produceone unit of food or one unit of clothing.Country Food

20 hours10 hours

Clothing50 hours20 hours

XY

Given this information, which of the followingstatements is correct?(A) X has a comparative advantage in the

production of both food and clothing.(B) Y has a comparative advantage in the

production of both food and clothing.(C) X has a comparative advantage in food

production, whereas Y has a comparativeadvantage in clothing production.

(D) Y has a comparative advantage in foodproduction, whereas X has a comparativeadvantage in clothing production.

(E) Neither country has a comparativeadvantage in the production of either good.

47. Which of the following groups of people wouldbenefit from unanticipated inflation?

I. SaversII. BorrowersIII. Lenders

(A) I only(B) II only(C) III only(D) I and II only(E) I and III only

48. An increase in the labor force participation rate will(A) increase investment and decrease savings(B) increase savings and decrease investment(C) have no effect on unemployment(D) make it easier to reduce unemployment(E) make it more difficult to reduce

unemployment49. Which of the following is a key feature of

Keynesian economics?(A) The level of saving depends mostly on

interest rates.(B) The level of government expenditure depends

mostly on interest rates.(C) Supply creates its own demand.(D) Macroeconomic equilibrium can occur at less

than full employment.(E) Wages are more flexible than prices.

50. If a large increase in total spending has no effecton real gross domestic product, it must be truethat(A) the price level is rising(B) the economy is experiencing high unemploy-

ment(C) the spending multiplier is equal to 1(D) the economy is in short-run equilibrium(E) aggregate supply has increased

51. According to Keynesian theory, the most impor-tant determinant of saving and consumption is the(A) interest rate(B) price level(C) level of income(D) level of employment(E) flexibility of wages and prices


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52. Under which of the following circumstanceswould increasing the money supply be mosteffective in increasing real gross domesticproduct?

BusinessInterest Rates Em:Qloyment O:Qtimism(A) High Full High(B) High Less than full High(C) Low Full High(D) Low Full Low(E) Low Less than full Low

53. Faced with a large federal budget deficit, thegovernment decides to decrease expenditures andtax revenues by the same amount. This actionwill affect output and interest rates in which ofthe following ways?

Out:Qut(A) Increase(B) Increase(C) No change(D) Decrease(E) Decrease

Interest RatesIncreaseDecreaseDecreaseIncreaseDecrease

54. If crowding out only partially offsets the effectsof a tax cut, which of the following changes ininterest rates and gross domestic product aremost likely to occur?

Interest Rates(A) Increase(B) Increase(C) Increase(D) Remain unchanged(E) Decrease

Gross DomesticProduct

IncreaseRemain unchangedDecreaseIncreaseDecrease

55. All of the following are components of themoney supply in the United States EXCEPT(A) paper money(B) gold bullion(C) checkable deposits(D) coins(E) demand deposits

. 2 1 .

~...lE - < ~@~C < : : ~ou0-< g :CBA

Long-runAggregate SupplyIShort-runAggregateSupply

56.

AggregateDemandREAL GROSS DOMESTIC PRODUCT

The graph above depicts an economy's aggregatedemand and aggregate supply curves. If aggregatedemand remains constant, the equilibrium pricelevels in the short run and in the long run will bewhich of the following?

o

Short Run( A) O A(B ) OB(C) OB(D ) OC(E) OC

Long RunOAOAOCOAOC

57. According to both monetarists and Keynesians,which of the following happens when the FederalReserve reduces the discount rate?(A) The demand for money decreases and market

interest rates decrease.(B) The demand for money increases and market

interest rates increase.(C) The supply of money increases and marketinterest rates decrease.(D) The supply of money increases and market

interest rates increase.(E) Both the demand for money and the supplyof money increase and market interest ratesincrease.


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58. An increase in which of the following is mostlikely to increase the long-run growth rate of aneconomy's real per capita income?(A) Population growth(B) The proportion of gross domestic product

consumed(C) The educational attainment of the population(D) The supply of money in circulation(E) Personal income taxes

59. An increase in the money supply will have thegreatest effect on real gross domestic product if(A) the marginal propensity to consume is low(B) unemployment is very low(C) investment spending is not sensitive tochanges in interest rates(D) the quantity of money demanded is not very

sensitive to interest rates(E) the required reserve ratio is high

60. If the Federal Reserve undertakes a policy toreduce interest rates, international capital flowswill be affected in which of the following ways?(A) Long-run capital outflows from the United

States will decrease.(B) Long-run capital inflows to the United Stateswill increase.

(C) Short-run capital outflows from the UnitedStates will decrease.(D) Short-run capital inflows to the United Stateswill decrease.

(E) Short-run capital inflows to the United Stateswill not change.

. 2 2 .


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T he C ollege B oardA dv an ce d P lac em en t E x am in atio n

MACROECONOM ICSSE CTIO N II

Tim e - 50 m inu tes

Copyr igh t 1995 C olleg e E ntran ce E xam in atio n B oard an d E du catio nal T estin g S ervice . A ll rig hts reserv ed .

23.


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MACROECONOMICSSECTION II

Time - 50 minutesDirections: You have fifty minutes to answer all three of the following questions. It is suggested that you take a fewminutes to plan and outline each answer. Spend approximately half your time on the first question and divide theremaining time equally between the next two questions. Inanswering the questions, you should emphasize the line ofreasoning that generated your results; it is not enough to list the results of your analysis. Include diagrams, if useful, inexplaining your answers. All diagrams should be clearly labeled.1. Over the past two years, the unemployment rate in Country X has risen from 5 percent to 9 percent. As the leader ofCountry X, you have been presented with two policy options to address the unemployment problem.

Policy 1: Use tariffs and quotas to restrict imports and thus protect jobs in Country X.Policy 2: Use monetary and fiscal policies to solve the unemployment problem without resorting to traderestrictions.(a) Explain two disadvantages of selecting Policy 1.(b) Describe in detail one specific monetary policy action and one specific fiscal policy action you would take to

reduce unemployment. Explain how each of these actions would affect each of the following in the short run.(i) Aggregate demand(ii) Output and the price level(iii) Real interest rates(c) Ifthe interest rate effects you identified in Part (b) continue in the long run, explain the impact ofthese effectson economic growth.


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2. Assume that the economy is in a recession.(a) Explain each of the following.

(i) Monetary and fiscal policies advocated by monetarists to eliminate the recession(ii) Monetary and fiscal policies advocated by Keynesians to eliminate the recession(b) Explain how monetarists and Keynesians differ in their conclusions about the effects of crowding out

associated with the stabilization policies outlined in Part (a).3. Explain how some individuals are helped and others harmed by unanticipated inflation as they participate in each ofthe following markets.

(a) Credit markets(b) Labor markets(c) Product markets


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Chapter IIIAnswers to the

1995 AP Macroeconomics Examination SECTION I: MULTIPLE-CHOICE who attempted each question and answered it cor-

rectly. An answer sheet gridded with the correctresponses appears on the next page.isted below are the correct answers to the multiple-choice questions and the percentage of AP candidates

Section I Answer Key and Percent Answering CorrectlyItem Correct Percent Item CorrectNo. Answer Correct No. Answer

1 E 31 B2 B 32 A3 C 33 C4 B 34 B5 D 35 E6 A 36 C7 B 37 C8 E 38 D9 D 39 B10 D 40 A11 E 41 E12 C 42 E13 B 43 A14 A 44 D15 B 45 B16 D 46 C17 C 47 B18 E 48 E19 E 49 D20 A 50 A21 D 51 C22 B 52 B23 C 53 E24 A 54 A25 E 55 B26 A 56 B27 B 57 C28 D 58 C29 D 59 D30 E 60 D

. 2 7 .


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SECTION II: FREE-RESPONSEReport of the Chief Faculty ConsultantRae Jean GoodmanUnited States Naval Academy

The Development ofFree-Response QuestionsThe first step in developing the free-response sectionof an AP Macroeconomics Exam is taken two yearsbefore the exam is administered, when committee mem-bers discuss the topic areas that have been covered inthe recent past exams and decide which topic areasshould be covered in the exam under construction.Each member selects questions for consideration bythe whole committee.From the proposed questions, in conjunction with

the focus topic areas, the committee selects free-response questions for use in the AP Exam. The com-mittee members discuss what information and eco-nomic analysis are important for a student to know foreach particular question. The questions are thenrewritten to conform to the consensus of the committee.In preparation for the next committee meeting, each

member prepares answers to the free-response ques-tions. The committee as a whole discusses these answersand rewrites portions of a question if necessary. At thispoint, if there is consensus that a question is ''just notworking," the committee will seek a replacement ques-tion. The revised questions are put through the sameprocess at the next committee meeting; further adjust-ments and refinements are made at this time.The free-response questions are answered and dis-

cussed at two more meetings of the committee; it is atthese two meetings that the committee forms possiblegrading standards. The questions are then adminis-tered in May to AP candidates. As an example, thetime line for the free-response questions of the 1997AP Macroeconomics Exam is:Initial question selectionFirst Review and RewriteSecond Review and RewriteThird Review andPreliminary Standards

Standards DiscussedExam Administered

Spring 1995Fall 1995Spring 1996Fall 1996Spring 1997May 1997

This process provides reasonable assurance thatimportant topic areas will be covered, questions willoffer sufficient direction without being overly pre-scriptive, and few free-response questions will "notwork" when administered to the AP candidates.

Setting and Maintaining StandardsThe development of the standards and procedures toensure consistent scoring of the free-response sectionsof AP Examinations is vital to the success of the APProgram and acceptance of AP grades by colleges anduniversities. The goal of the process is to have allfaculty consultants evaluate the students' responsesfairly, uniformly, and according to the standards.Prior to the June Reading, the chief faculty consult-

ant uses the AP Economics Development Committee'sinput and samples of actual student responses to draftscoring standards and point allocation for each free-response question. Two days before the Readingbegins, the chief faculty consultant, table leaders, andconsultants from Educational Testing Service (ETS)meet at the Reading site. The table leaders review a setof sample student answers that they have received anddevelop ideas about the scoring standards to apply tothose answers.

The table leaders for the macroeconomics ques-tions, along with the chief faculty consultant and theETS consultants, review and revise the preliminarystandards and point allocation. The standards areapplied to a sample of actual student answers. Scoresare then assigned, by consensus, to these answers. Thisset of scoring standards will be used to train facultyconsultants in evaluating the student responses.The chief faculty consultant, microeconomics and

macroeconomics table leaders, and ETS consultantsmeet to discuss and review the scoring standards for allAP Economics free-response questions. In general,the final wording of the scoring standards is completedat this time.Following an introductory meeting, the Reading

begins with a session to train all faculty consultants toapply a single set of scoring standards to each questionconsistently. The faculty consultants are divided intogroups of five to eight among table leaders. The tableleader provides each faculty consultant with a set ofstudent responses and the scoring standard for thequestion which will be read by the particular table;several tables may score a single question .

29.


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The table leader and faculty consultants discuss thequestion and the correct answer to the question. Thescoring standard is then explained and discussed, afterwhich the faculty consultants apply the standard to theset of sample student responses. Scores for the samplesare compared and discussed. At this point, the facultyconsultants are learning the various levels of studentability which are reflected in the answers and the rangeof nuances consistent with each score.The next step in the process is a "round robin": each

faculty consultant is given an exam; everyone scoreseach exam; the scores are discussed and compared;and a consensus is reached. If there is more than onetable scoring a question, the round robin is performedacross the tables to ensure that all faculty consultantsscoring a particular question are applying the samestandard. The goal is a consistent and reliable applica-tion of the standards.The original training is reinforced and checked in atleast three ways. First, at the beginning of the second

day of the Reading, each question is subjected to around-robin check. This confirms that all the facultyconsultants have retained the scoring standard train-ing. Throughout the remainder of the Reading, at a rateof once a day, two additional types of checks arecarried out: a self-check and a table-leader check. In aself-check, each faculty consultant is asked to rescorea set of three to five selected papers that he or she haspreviously scored, without seeing the original scores.When differences occur, the faculty consultant recon-siders the final score in consultation. with the tableleader. A table-leader check involves the table leaderrescoring exams scored by faculty consultants at thetable. Once again, when discrepancies occur, the tableleader and faculty consultant confer. Many times thesediscussions expand to include all the faculty consult-ants at the table and the occasion is used as a learningexperience.When more than one table is scoring a question, to

ensure consistency across tables, one table leader mayrescore exams scored by faculty consultants at anothertable.Throughout the training and the Reading, the fac-ulty consultants are reminded of several guiding prin-

ciples. First, they are encouraged to use the full rangeof the grading scale. They are also reminded that thehighest score should be applied to excellent, not neces-sarily perfect, responses. Faculty consultants are trainedto discuss a problematic student response with eitherother consultants at the table and/or the table leader.This leads to multiple evaluations of problematic stu-

dent responses and a final determination may be madeby the chief faculty consultant.As in allAP scoring procedures, the faculty consult-

ant does not know the name of the student nor are thescores for other questions on the exam seen. A facultyconsultant evaluates only one question on a particularstudent's exam. All of these measures are designed toprovide fair and consistent scoring of a student's re-sponses.

The ReadingIn June of 1995, 45 secondary school, college anduniversity economics teachers met at Trenton StateCollege in Trenton, New Jersey, to read and evaluateover 37,000 free-response essays written by more than12,500 AP Macroeconomics candidates. The facultyconsultants are experienced economics instructors ofeither undergraduate introductory economics coursesor of AP courses in secondary schools. Approximately25% of the faculty consultants were new to the APReading in 1995. The faculty consultants reflect thedifferent geographic regions, types of institutions, andracial and ethnic groups of the candidates and institu-tions which participate in the AP Program.The macroeconomics faculty consultants were

divided into three groups, each assigned to read one ofthe three essays. The largest number, twenty-four, wereallotted to read the long macro question; thirteen wereallocated to read Question 2; and eight were assignedto Question 3. The aim of the chief faculty consultantis to distribute the faculty consultants in the correctproportion so that anyone reader reads only one ques-tion throughout the Reading. If this objective is met,the reliability of the evaluation should be maintainedbecause consensus on the scoring standards will bereached among fewer people, and the Reading will bemore efficient because time will not be taken to retrainfaculty consultants to score a second question.

General CommentsThis is the third year of the three-question format forthe AP Macroeconomics Examination. There wasagreement that the questions were generally of highquality and difficulty, but at the same time were fairand addressed content that is fundamental tomacroeconomic principles courses in universities andcolleges nationwide; the procedures for evaluationwere well developed and carefully implemented. Thequestions focused on relevant subjects and required


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macroeconomic analysis. The long question involvedstabilization policies, the short-run impact onmacroeconomic variables, and the long-run impact ofthe policies on economic growth. The second questioninvolved the policy prescriptions of two major schoolsof thought: Keynesian and monetarist. The third ques-tion focused on the economic effects of unanticipatedinflation.Graphical analysis is an important tool for econo-

mists and, thus, the better answers usually use graphsto supplement the verbal analysis. Through 1995,graphical analysis was not required for the APMacroeconomics Examination, although in the scor-ing process graphs could help a student. If a studentgraphically demonstrated correct knowledge which

was not discussed in the verbal presentation, the stu-dent received credit. Beginning in 1996, graphicalanalysis may be required on the AP MacroeconomicsExam.The sample student responses that follow are repro-

duced in their original format, unedited for grammar,spelling or punctuation. All are used with the permis-sion of the students, who understood that theirresponses might be published at a later date. Whenreading these responses, keep in mind that they werewritten under exam conditions and within a time limitand that the responses were, in part, selected for leg-ibility. You are not seeing the full range of penmanshipor writing skills seen by the faculty consultants.


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Fre e-Re spon se Ques tio n 1Over the past two years, the unemployment rate in Country X has risen from 5 percent to 9 percent. As the leader ofCountry X, you have been presented with two policy options to address the unemployment problem.

Policy 1:Policy 2: Use tariffs and quotas to restrict imports and thus protect jobs in Country X.Use monetary and fiscal policies to solve the unemployment problem without resorting to traderestrictions.(a) Explain two disadvantages of selecting Policy 1.(b) Describe in detail one specific monetary policy action and one specific fiscal policy action youwould take to reduce unemployment. Explain how each of these actions would affect each of thefollowing in the short run.(i) Aggregate demand

(ii) Output and the price level(iii) Real interest rates(c) If the interest rate effects you identified in Part (b) continue in the long run, explain the impact ofthese effects on economic growth.

Question 1 S corin g Guid eBasically the point distribution is 2 points for Part (a);5 for Part (b); and 2 for Part (c).Part (a): 2 pointsTwo disadvantages to tariffs and quotas may include: domestic prices will rise resulting in a lower

standard of living; trade war/retaliation resulting in increaseddomestic prices and unemployment;

if foreign income decreases due to lost domesticmarket of Country X, resulting in a decreaseddemand for exports of Country X, then unem-ployment in Country X will increase;

increase in unemployment in import dependentindustries;

loss of economic efficiency (comparative advan-tage explanation);

reduced competition in Country X implyingincreased market power in domestic industries;

Points:1 point per disadvantage and explanation.Part (b): 5 pointsExpansionary monetary and fiscal policies are required.Expansionary monetary policy must include one of thefollowing: OMO purchases, reduction in reserverequirement, or reduction in discount rate. Monetarypolicy leads to an increase in the money supply; adecrease in real interest rates; an increase in invest-ment which is a component ofAggregate Demand; ADincreases, resulting in increased output and prices.

Fiscal policies are increasing government spending ordecreasing taxes (corporate or personal income). Anincrease in G will directly increase AD resulting in anincrease in output and prices. A decrease in taxes willincrease C (or I if corporate taxes discussed) anddirectly increase AD. Output, employment, and priceswill rise. Real interest rates will rise because the increasein government spending increases the demand for fundsin the bond market (or loanable funds market). Analternative explanation is that nominal interest rateswill rise because the expansionary fiscal policyincreases income which, in turn, increases the demandfor money. The effect on real interest rates is ambigu-ous because the magnitude of the price increase rela-tive to the nominal interest rates' increase is unknown.Points:1 - Correct stabilization policies (a 1 / 2 point for each

policy).2 - Monetary policy explanation of linkages of real

interest rate-investment-AD, output and price.1

1 { tr -) tADiAD -) to, ip1 - Fiscal policy linkages of GITX resulting inAD,

output and price explanation.1 - An explanation of the fiscal policy effect on real

interest rates.


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Part (c): 2 pointsThere are contradictory effects of interest rates as aresult of the two stabilization policies - this shouldbe noted by the student; however, consistency withanswer to Part (b) is paramount. Decreasing interestrates will encourage investment which will stimulatecapital stock growth or economic growth which in turnwill shift the long-run aggregate supply curve or theproduction possibilities curve/frontier. [Positive netinvestment increases or investment in excess ofreplacement investment increases.] Increasing interestrates will have just the reverse effect - including aleftward shift in the long run aggregate supply curve orproduction possibilities curve.Points:1 - For the linkage of interest => investment =>

economic growth. Interest rate direction must beconsistent with answer in Part (b).

1 - Shift in long run aggregate supply curve or theproduction possibilities curve.

Alternative Acceptable Answers: The monetarists would say that fiscal policy wouldnot be as effective as Keynesians would and that itwas probably fiscal policy which got us into thecurrent situation. The monetarists would use themonetary policy tools to maintain a constant moneysupply growth to ensure a stable financial environ-ment to permit the economy to self-adjust towardfull employment GDP.

Supply-siders would suggest that a decrease in taxeswould provide incentives for increasing productiv-ity and thus the AS curve would shift rightward. Anaccompanying AD shift is required for full credit.To receive credit for an alternative answer, the stu-

dent had to specify that the answer was using a par-ticular theory. Other economic schools of thought wereaccepted and evaluated; however, no other school ofthought generated a sufficient number of answers toprovide a rubric. These answers were evaluated by thetable leader.Besides counting points, the answer may be looked

at as a whole and ultimately judged by its overallquality, This is particularly true if the total point count

includes a half. The final total should mean somethingin terms of the overall quality of the answer: 8 or 9should reflect an excellent answer (a 9 is not necessar-ily a perfect answer); 6 and 7, a good answer; 4 and 5,an adequate answer; 3,a seriously deficient answer,but still an answer; 2, answers that are lots of wordssignifying nothing except one sustained argument; 1,acorrect, relevant-to-the-question statement; 0, no rel-evant economic answer to the question. Using theholistic approach, the 1or 2 is a "bottom up" approach.Overall Comment onStudent Responses to Question 1Students continued to experience difficulty in address-ing the impact of fiscal policy on interest rates andeconomic growth questions.The primary mechanism by which fiscal policy

affects interest rates is through the loanable fundsmarket. If the government desires to increase govern-ment spending or decrease taxes, the resulting budgetdeficit must be funded through the sale of governinentsecurities. When the Treasury enters the loanable fundsmarket, the demand for loanable funds increases andthe interest rate rises. The reverse occurs withcontractionary fiscal policy. Many students addressthe interest rate effect of fiscal policy through themoney demand function. The standard line of reason-ing is that increases in government spending increaseaggregate demand which in turn increase equilibriumincome. The increase in income will increase thedemand for money thereby increasing interest rates.The above reasoning is correct; however, it is a sec-ondary effect, which applies to expansionary mon-etary policy as well as to expansionary fiscal policy.On the issue of economic growth, students confuse

increases in GDP brought about by increases in aggre-gate demand with economic growth. Economic growthinvolves the change in productive capacity. We canrepresent economic growth by a change in potentialGDP, changes in the long-run aggregate supply curve,or shifts in the production possibilities curve. Merelystating that an increase in investment leads to eco-nomic growth is not sufficient. The increase in invest-ment must be beyond replacement investment; alter-natively, the student could state the effect as an increasein net investment.

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Sample Student ResponsesStudent Response 1(Score 0/9)

Q\,,:l ~:ti' fu_ -(!'\CJ.I\Q06f4, ~ h ~ r > l u ,t " O f \ ( N C d ' ' ' : L " , , \ r ~ t f \ a k : : : Rea.\~\\'tN.~~':::i:"~~r.,,\..Il>~


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S c > ~hfgq.l;~y) ~,l ~oks1j.L1{,5 \\100[& prdlPabfy tlkif: ~ "~ l~~eat\y ? p l y , ' ~ I'~WoulA;OCu.,:'I~'B'A ~dh?()3bt-~wQ..(\I \~IJ" 1 - \ , ' - Q _ 0 \~I,h..

, :r . l .- -=-, :r : ; , .Ol.-f~J'W.S~, G~~ , G.vrl.G~rQ.nI\t:h------~----------~----------~~------------------~------~~---te~~y-\('\,,~ ~B~ r-H~ No .,,>b u n t T r V W ; \- rn . ' "kS ".)\'\k.-b,~w;lu:\:g~. 0..


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Student Response 2 (Score of 8)

1cc. t.lS~ of c/ I(odLict

I

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a.~ 5Qf V '\ I"~

p ~ : c , ~ ( f \~)?~ ,A S J.. .\?+ - - ~t--~---GnJ pComment: The candidate correctly identifies two arguments against the use of tariffs and quotas: efficiency is

reduced and prices are artificially increased with the reduction in domestic competition. InPart (b), the studentcorrectly describes the effects of expansionary fiscal and monetary policies. However, the interest rate effect offiscal policy is incorrect. The correct argument is that the increased demand for funds by the government to financethe increase in government spending increases the demand for loanable funds and thus, increases the interest rate.In Part (c), the candidate clearly and concisely presents the argument that the decrease in interest rates (the onlyinterest rate effect identified by this candidate) increases capital investment spending, which can lead to increasedproductivity and a rightward shift in the long-run aggregate supply curve, which decreases the price level andincreases output.

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c.)P~-I ;G,-d'~eol492oe .;t.~ ~ ~. ;;bf.a-x1UtJ.~~~~~~~1~

~~ ~, ~ 1( ~ zc& ~ M~ , 'X w -JY ~ .Ix d & M .w 8 4 ~ ~ } ~~~~~

O....v

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ory ~~.~ .7~' Ad~ ~-r ~~;~~~~tf~~/1-V\ ~ ~-ul~.~~ ~ ~1'~ ~~ ...dk. ~.

"_ > "..

Comment: The student receives full credit in Part (a) for the retaliatory tariffs argument and for reduced incentiveto compete in the domestic market after protection. In Part (b) the essay correctly prescribes an expansionary fiscalpolicy which increases aggregate demand resulting in increases in output and prices. For fiscal policy, the interestrate effect was explained using the increased demand for money. This is a secondary effect which comes from theincrease in GDP. The preferred interest rate effect as the increase in demand for loanable funds (or increased supplyof Treasury securities) was not discussed. The discussion of monetary policy is fully adequate although notpresented in a logical sequence. The increase in money supply leads to a decrease in the interest rate whichincreases investment. The increase in investment increases aggregate demand which increases output and prices.The answer in Part (c) does not address the question of how the interest rate changes affect economic growth and,hence, receives no credit.

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Will be wore expensive. tOI1Sl1rne..rs wQu\dbeI~S$ and tine ones that do comf, ;ntotbe. county~

~ :~ ~ ~~ !::e~ =;::~ ~ ~ ~ ~ :;~ 6.\).)11\D(Ie.ace d isposab le . -lOcome..) -ASa shawn a b o v 'e . . ) thiS will"ncrease C ! f f j r e s a t e . demand) prig level C W l d OUtput and decrae:re a I InC;et'st rates. .

B GNP SlApp l o f Y Y " o n ~ incre~es-

Comment: The student receives partial credit in Part (a) for the argument that tariffs and quotas wi11lead toincreased prices in the domestic economy. The discussion of expansionary monetary policy receives full credit inPart (b); however, the discussion of fiscal policy is very brief and there is merely an assertion concerning theinterest rate effects of fiscal policy. Thus, only 4 points are earned in Part (b). A point is earned for linking theinterest rate decline to an increase in investment to economic growth in Part (c) .

40.


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Student Response 5(Score of 5)

It JJ~ [ . ' c . - / l ... / S c d"rfl! # l C U ; Y 6 J C d Ii/ll(~ I ,~/le &/ )'re yD~ I 'S tflr (C,1! ; '5 .t Jf".g (MC) /"(-?"/Id;

1/01

-.J1i10tlf 4" Y' Rtf t . . . . , v I'

Jl,f ~ " ~ I ZM/,e~ /f J,It, { f I z t ,svt//., tit &d , ,?v . T A ' ; - / a s : w,t} h,O$ q7' ;

e z t e a n1t'!i/(ef. !)uv, n ( J , C ) ( 7 J , a" I .,/7

. /_.1'!Id~. V(;>v t:I ..J

(/ /.,J k 'e 4 Ly:" . z L t' It . f rI , l ' /1 0 c....'"v'( t " , , . ; ),P/ fo ,.,,~,--,'/1 (&"'$ , a" j"t. ;,/1 r L . f ~,,'U' ; P r d J wA,let "",:/!1 , . " 'c, t,~r tf!'fltPII; f c , / " -;, . . !-tl?/l) . . . , . . ' / 1y! ()H t'v' ! 's - r Ie 11'." )


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w/// G 15c? C ,,/It 'a ~" r ; . ) e 610/('det). dt15 1 . . / 4 . > t . 1../,"'1 I Q t--'l-

b t t: /h rloJ / y o ..cal " /1(,. /fl

w:Uf'I n e.

./,, ,

Comment: This essay correctly indicates that the decrease in net exports as a result of tariffs and quotas willactually increase the unemployment problem using the leakages-injection model. The candidate receives 1 pointfor Part (a) because a second disadvantage of tariffs and quotas is not presented. In Part (b), the essay correctlydescribes expansionary monetary policy and its effect on the economy; the interest rate-investment-aggregatedemand linkage is well done. The fiscal policy description is adequate. However, the interest rate effect of fiscalpolicy is incorrect. Thus, the essay receives only 4 of the 5 points in Part (b). Part (c) is not addressed; the studentdiscusses the international effects of the domestic policy which was not the question on the 1995 exam. Graphicalanalysis is used to enhance the answer.Student Response 6 (Score of 4)

U-l-...

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Comment: The answer to Part (a) involves a series of assertions with no explanation as to why tariffs and quotas donot stimulate employment. Expansionary monetary policy is correctly discussed with its effects via the interest rateand investment. The graphical analysis amplifies the essay. The fiscal policy description is good. However, theinterest rate effect of fiscal policy is not addressed. Part (c) is not attempted. Thus, the student receives no credit forParts (a) and (c), and receives 4 of the 5 points in Part (b).Student Response 7(Score of 3)

o.) Be 51!f(' T t O J imescxs: mal proreCT in bs to to (')1 TIf";I X .However, if COVI1Tr"i - x d o e s nor have a P"eroprlgTe oart/raJ, I ,reSOcJfce;u doefJ nor ha.~e evu:)uJ l i l tlf T"hpse reG 0[,1rces/ DC isTe d 1 i J 01 C Z 5 ; - atllykll in) ( V J pioJvcri t!n of These' resovrc:e;, r/,po.dome;, Tj'C , o r - o i u e Tiok? coul) Jec,/,'rle fo,.. These ?iolv? (..The. Tariff? avJ~ILOTrzS i'r2Tecfeie wtrhfl The ~?O~;rIve. ((~gec;-S~ - r jof. comp:rrl It ve ajVq/l1TO'!J~/ (Jvzjovrj'u! deGt eoge'5.de?trne. a5 c A resu/rt!J{ -Trade kx:rtrfers tnoi"her COUiATr/t""'5./:,) I be bl?2T LMoneTdCj pa/lei ocr/on wavY he. .The

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Eftl { .1 S lFB -; nereby tn l t ftZSi'!3 T l J O O e t s opplf au d d e c . r e a ' i l [ l 1 Jreo

~ A n elamP1e c.,f A~!2c.a1 p41Gy' woc.ll be' i'7crec1t;eJ3ol/~tJmt11r~ p e r t l ; " J " T h f 5 161c,!,C/eJ c / { ) y Y l a J l J / ,t7t1 a 9teaclf ItfCJUty'

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bsll ci LVrl ! Cav9~ an taasese. tn iOH?Lr : rn tfJ//e5TU1t?IlTmJ; ' a p r e ; ; O T l d v J . Itowe{/e'f'.t tl?F eXJ2Q rT~ woul) eVeb1 r;_"q/lf

Comment: The essay is inadequate. The student receives credit for the possibility of retaliatory trade barriers. InPart (b), the student identifies expansionary monetary and fiscal policies as the correct stabilization policyprescriptions which earns the student 1point. An additional point is awarded for the effect on aggregate demand ofexpansionary monetary policy, although the student misses the interest rate-investment relationship. InPart (c), thestudent confuses foreign investment with capital investment and thus receives no credit.


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Comment: At this end of the scale, students indicate a great lack of economic knowledge. This essay earns 1 pointin Part (a) for mentioning the possibility of retaliatory trade policies and 1 point for correctly identifying anexpansionary monetary policy and expansionary fiscal policy.Student Response 9(Score of 1)

nmi~~C~~~~\f!j~ti~~~~~ec-( l O l A ~ + C ; e s . IA)ish i 0 < , 3 - \ 0 e'tfbr+:k O N 11Cj~ 6'kher Q(S(do m e S W ls\\in ~in itocif. ~ not W Q V l f ~ WQj+ (1%dcm::L_ : f u r (\()urrhx~ X - b O O \ I Q \ < Jo ~Alll\e . ~ h4 Iu n 0 Y p f " ( j v n - e v tL Qn


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& l S s Q a . \ r.D\[(\,'d W A I , . , . _ \ d ~'lb\tJ \ > e b \ o w e v ~S1AIKV'nVbetf:3pn'X-linJ'0'/\ %J~S 6\LbQ!C~GN:> e - p \ ~ . q ; m 0 A t c e - s e B 4 C h \ Q A 1 . , e f I I Q r n m e I L t -

Comment: This candidate's response is extremely inadequate. The response consists of nearly two pages ofincorrect statements, as inthe explanation of monetary and fiscal policy, or statements unrelated to the question, asin the first paragraph on tariffs and quotas. The candidate does address, in a limited way, the possibility of a"negative reaction"- trade war/retaliation and for this receives a point. This is an excellent example of anapplication of the holistic approach to scoring; the reader looks for a correct relevant statement.


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Free-Response Question 2Assume that the economy is in a recession.(a) Explain each of the following.(i) Monetary and fiscal policies advocated by monetarists to eliminate the recession

(ii) Monetary and fiscal policies advocated by Keynesians to eliminate the recession(b) Explain how monetarists and Keynesians differ in their conclusions about the effects of crowding out associatedwith the stabilization policies outlined in Part (a).

Question 2 Scoring GuideBasically the point distribution is 3 points for Part (a);2 for Part (b).Part (a): 3 pointsMonetarists would advocate a money rule with nodiscretionary monetary or fiscal policy. They believethat fiscal policy is neutral due to crowding out. Themonetary rule is growth of the money supply at thegrowth rate of real GDP, at 3-5% a year, or at anannounced constant rate.Keynesians believe that an expansionary fiscal policy

should be used to eliminate a recession. Keynesians, ingeneral, think that monetary policy is ''unreliable'' orless effective than fiscal policies. Low interest rateswill not necessarily induce increased business invest-ment or consumer spending.Points:1 - Student demonstrates an understanding of the

monetary rule. Student must do more than statethat the monetarists have a monetary rule, butdoes not have to explain it in detail.

1h - Monetarists believe fiscal policy is ineffective.1 - Keynesians advocate an expansionary fiscal

policy to eliminate a recession.1h - Fiscal policy is more effective than monetary

policy, or monetary policy is ineffective, ormonetary policy is complementary to fiscalpolicy.

Part (b): 2 pointsMonetarists believe that there is complete crowdingout, thus making fiscal policy ineffective. Keynesiansbelieve that there is little or no crowding out. Crowd-ing out occurs when the government borrows moneyto increase government spending and thus reducestheamount ofloanable funds available to the private sector.Alternatively, the government enters the loanable

funds market and is willing to pay whatever interestrate is necessary to "call forth" the funds required. The

increase in interest rates reduces investment in theprivate sector.Some students may discuss the differences between

Keynesians and monetarists in terms of the interestsensitivity of investment - this is acceptable if correct.Points:1 - Statement that monetarists believe that there is

crowding out and Keynesians believe there islittle or no crowding out.1 - Explanation of why monetarists and Keynesians

take these positions. This explanation needs todemonstrate an understanding of crowding out.

Besides counting points, the answer may be lookedat as a whole and ultimately judged by its overallquality. This is particularly true if the total scoreincludes a half point. The final total should meansomething in terms of the overall quality of the answer.5 should reflect an excellent answer but not necessar-ily perfect; 4, an excellent answer with a flaw; 3, agood answer; 2, an adequate answer; 1, a seriouslydeficient answer, but still an answer; 0, all else.Overall Comment onStudent Responses to Question 2The first short answer question asked the student tofocus on the difference between the monetarist andKeynesian policy prescriptions for an economy in arecession. This question emphasized the need for know-ing two important schools of economic thought and, inparticular, the stabilization policies advocated by thedifferent schools of thought. Many students respondedby providing a discussion of expansionary stabilizationpolicies, completely ignoring the viewpoints of Keynesand the monetarists. There was also evidence thatstudents are unable to explain the crowding-out effect;although they may know the monetarist and Keynesianviews of crowding out.


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Sample Student ResponsesStudent Response1Score of 5)~) . .. . . . . .

(0 '>~

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Comment: This essay clearly indicates that monetarists would not use discretionary policy; monetarists wouldfollow a monetary rule of a 3-5% per year increase in the money supply; and monetarists believe that fiscal policyis ineff

AP1995 Macroeconomics RE

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