May 18 2008

2008 Macroeconomics Free Response Questions – first impressions…

Published by at 6:22 pm under AP Economics

AP Macroeconomics 2008 FRQ form BThree days ago students all over the world sat for the Macro and Microeconomics Advanced Placement exams. 48 hours later, the College Board released the free response questions on their website. Being at an international school SAS students took “Form B” of the exam.

In this post I will reflect on the FRQs from the macroeconomics exam.

First, question 1: An imaginary country operating at full employment experiences a deficit financed increase in government spending.

Part (a) asks students what the impact of the new government spending will be on aggregate demand and aggregate supply. Easy enough! Since “G” is a component of AD, an increase in government spending will shift AD out while short-run aggregate supply remains the same.

Part (b) is simply a graphical representation of the answer to part (a), asking students to show the effect on output and price level. The new government spending will increase output and the price level.

So far, the question has been very straightforward and what I’d consider easy for even weaker students. In part (c), the question asks students to show the impact that the government’s borrowing from the public has on the real interest rate and the market for loanable funds. Here I am guessing the AP readers will accept either a leftward shift of supply or a rightward shift of demand. The question does not ask students to explain the shift, only “show”. Either demand or supply can shift when the government increases its deficit through issuing new bonds, as I explained HERE.

Finally, parts (d) and (e) broaden the scope of this question to international economics, a section of the syllabus that was not traditionally included in the long free response questions, but has been for two years now, and I expect it will continue to be a theme of the FRQs in the future.

Part (d) asks what effect higher real interest rates will have on supply of the country’s currency on foreign exchange markets and the value of the currency. My answer would be that as real interest rates rise households will save more, spend less on imports, thus supply less of their currency, causing it to appreciate on foreign exchange markets. This question may have stumped some kids. I typically teach that higher real interest rates will increase demand for a country’s currency, as foreigners direct their financial capital into the country’s financial markets in pursuit of higher real returns on their investments.

Finally, part (e) is simple enough, asking the impact of the now appreciated currency on net exports. As the country’s goods become more expensive to foreigners, net exports will decline, possibly offsetting the initial increase in government spending.

Overall I’d say that FRQ number 1 was FAR easier than last year’s FRQ on which students had to illustrate the impact of rising exports from New Zealand on the country’s money market and its real interest rates, also involving an explanation of how Australia’s economy might recover from a recession without any government action, requiring an understanding of the neo-classical theory of flexible wages, vertical aggregate supply, and self-correction… overall a MUCH tougher question than this year’s!

Stay tuned for my impression of numbers 2 and 3 of the 2008 form B FRQs!

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

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