2026 AP Macroeconomics FRQ Answers (Unofficial)

Part (a)

Graph AD, SRAS, and LRAS for an economy in an inflationary gap, marking current output and price level (Y1, PL1) and full-employment output (YF).

Draw AD downward sloping, SRAS upward sloping, and LRAS vertical. The current equilibrium is where AD crosses SRAS: label that output Y1 and that price level PL1.

Because Micanapy has an inflationary gap, Y1 must sit to the right of YF. Place LRAS vertical at YF, to the left of Y1. The horizontal distance from YF to Y1 is the inflationary gap.

2 points: 1 for AD, SRAS, and LRAS labeled; 1 for Y1/PL1 at the AD-SRAS intersection to the right of YF.

Part (b)

Explain how the economy self-adjusts back to full employment in the long run if policymakers do nothing.

Output above full employment means unemployment is below the natural rate, so labor and other inputs are scarce. Workers and input suppliers bid up nominal wages and input prices.

Higher input costs raise firms' cost of production, so SRAS shifts left. SRAS keeps shifting left until it meets AD at YF on the LRAS. Real output falls back to YF and the price level rises further.

1 point: rising nominal wages/input prices shift SRAS left until output returns to YF.

Part (c (i))

Name the specific open-market operation a limited-reserves central bank uses to close the inflationary gap.

The central bank sells government bonds (an open-market sale). Selling bonds drains reserves from the banking system and reduces the money supply, which is the contractionary move needed to close an inflationary gap.

1 point: sell bonds / open-market sale of securities.

Part (c (ii))

Draw the money market and show how the open-market sale affects the nominal interest rate.

Label the vertical axis nominal interest rate and the horizontal axis quantity of money. Draw money demand (MD) downward sloping and money supply (MS) vertical.

The open-market sale shifts MS left, from MS1 to MS2. The equilibrium nominal interest rate rises from i1 to i2.

2 points: 1 for a labeled money market with vertical MS and downward MD; 1 for MS shifting left and the rate rising.

Part (d (i))

State and explain what happens to international financial capital flowing into the country after the interest rate change.

Inflows of international financial capital increase. The higher nominal interest rate raises the return on Micanapy's financial assets, so foreign investors move funds in to earn that higher return.

1 point: increase, because a higher interest rate attracts foreign financial capital.

Part (d (ii))

State the effect of the interest rate change on the price of bonds already issued.

The price of previously issued bonds decreases. Bond prices move inversely with interest rates: once market rates rise, older bonds paying lower fixed coupons are worth less, so their price falls.

1 point: decrease (bond prices move inversely to interest rates).

Part (d (iii))

State the effect of the interest rate change on private domestic investment spending.

Private domestic investment spending decreases. A higher interest rate raises the cost of borrowing, so fewer investment projects are profitable and firms borrow and invest less.

1 point: decrease (higher borrowing cost reduces investment).

Part (e)

Given the change in investment, say whether short-run unemployment rises, falls, or holds, and explain.

The unemployment rate increases. Lower investment spending is a fall in a component of aggregate demand, so AD decreases and real output falls. Firms produce less and lay off workers, raising unemployment in the short run.

1 point: increase, because lower investment lowers AD and output.

Part (a)

Find the number of employed people from the labor force and the number of unemployed.

Employed = labor force minus the unemployed = 15,000,000 minus 900,000 = 14,100,000.

Retirees and people not looking for work are outside the labor force, so they are not subtracted here.

1 point: 14,100,000.

Part (b)

Calculate the actual unemployment rate and show the arithmetic.

Unemployment rate = unemployed divided by labor force, times 100 = 900,000 / 15,000,000 times 100 = 6%.

1 point: 6% with work shown.

Part (c)

Graph the short-run and long-run Phillips curves, mark the short-run equilibrium as X, and plot the numerical values.

Put the inflation rate on the vertical axis and the unemployment rate on the horizontal axis. Draw the short-run Phillips curve (SRPC) downward sloping and the long-run Phillips curve (LRPC) vertical at the natural rate, 3%.

Plot point X on the SRPC at 6% unemployment and 2% inflation. Because actual unemployment (6%) is above the natural rate (3%), X sits to the right of the LRPC.

2 points: 1 for downward SRPC and vertical LRPC at 3%; 1 for X at 6% unemployment and 2% inflation, right of LRPC.

Part (d)

Say whether the unemployment rate changes when some counted-as-employed workers retire, and explain.

The unemployment rate increases. Retiring workers leave the labor force, so both employment and the labor force fall by that number while the count of unemployed stays the same.

Since the unemployment rate is unemployed divided by the labor force, a smaller labor force with the same number unemployed gives a higher rate.

1 point: increase, because the labor force shrinks while the number unemployed is unchanged.

Part (a (i))

Name the specific expansionary action an ample-reserves central bank takes to close a recessionary gap.

The central bank lowers the interest rate it pays on reserve balances (IORB). In an ample-reserves system the central bank steers the policy rate with administered rates, so cutting the IORB (and the overnight reverse repo rate) lowers the policy rate and is the expansionary move.

Lowering the discount rate is also accepted as an administered-rate cut.

1 point: lower the IORB / administered rate (expansionary).

Part (a (ii))

Compute the smallest government spending change, and its direction, that closes the 600 million crown recessionary gap when MPC is 0.75.

Spending multiplier = 1 divided by (1 minus MPC) = 1 / (1 minus 0.75) = 1 / 0.25 = 4.

Required change in G = gap divided by multiplier = 600 million / 4 = 150 million crowns. The direction is an increase, so government spending rises by 150 million crowns.

2 points: 1 for multiplier = 4 or the 150M figure; 1 for identifying an increase in spending.

Part (b)

State whether the calculated spending change raises, lowers, or leaves the price level, and explain.

The price level increases. The rise in government spending increases aggregate demand, and along an upward-sloping SRAS a higher AD pushes the price level up in the short run.

1 point: increase, because higher G raises AD along an upward-sloping SRAS.

Part (c)

Graph the foreign exchange market for the crown and show how the higher Lizland price level changes the crown's value against the Andoh note.

Label the vertical axis price of the crown in Andoh notes (AND per LIZ) and the horizontal axis quantity of crowns. Draw demand for crowns downward sloping and supply of crowns upward sloping.

A higher Lizland price level makes Lizland goods more expensive to Andoh buyers, so demand for crowns falls: shift the demand curve left. The equilibrium value of the crown falls, so the crown depreciates.

2 points: 1 for a labeled forex market for the crown; 1 for demand shifting left and the crown depreciating.