Correct Answer and Standards for 1997 Macro Free Response
1. Grading Rubric for Microeconomics Question 1: 9 Points
Part (a): 3 points
The FED has increased the money supply by 5% leading to a decrease in the interest rate which increases investment and/or consumption and aggregate demand. The rightward shift of AD results in an increase in GDP and price level.
Point allocation:
˝ point - Increase in Ms causes the real interest rate to decrease. ˝ point - The decrease in interest rate causes an increase in the interest-sensitive components of aggregate demand (investment and/or consumption). 1 point - An increase in investment and/or consumption increases the aggregate demand which increases output. 1 point - An increase in aggregate demand increases the price level. The absence of the linkages between interest rates and investment, and investment (interest-sensitive components of AD) and AD caps the possible score at 2. If the answer merely has correct assertions the score is capped at 1.
Part (b): 1 point
1 point for the correct graph.
Part (c): 1 point
1 point for the correct graph.
Part (d): 1 ˝ points
As seen on the money market graph, any given increase in the money supply will result in a greater change in the interest rate in Country Y. With an interest inelastic demand for money, any change in the money supply results in a greater change in the interest rate than with a more elastic demand for money.
˝ point - Country Y 1 point - Explanation
The answer must persuade the reader that they are doing a comparison between country X and country Y.
Part (e): 1 ˝ points
As the interest rate falls, the level of investment increases more in Country Y than in Country X. Because the increase in investment increases aggregate demand, the increase of GDP is greater in Country Y.
˝ point - Country Y 1 point - Explanation The answer must persuade the reader that they are doing a comparison between Country X and Country Y.
Part (f): 1 point
Country Y reflects the monetarists’ description of the economy. Monetarists believe that the demand for money is interest inelastic.
1 point - winner take all. [No explanation is necessary.]
Note:
If the result is a half-point score and the student gets part (b) and/or part (c) correct, then the score should be rounded up to the next grade. In other cases, use the holistic approach.
2. Grading Rubric for #2: 5 Points
Part (a): 2 points
˝ point - Correct sectors: households, business, and government. ˝ point - Correct markets: product and input/resource. ˝ point - Flow of goods and services, and resources. ˝ point - Flow of money payments. NOTE: The omission of any sector caps part (a) at 1 point.
Part (b): 1 point
GDP can be calculated by either summing the income flows or summing the expenditure flows.
˝ point - Income method: wages and salaries, interest, profit and rents ˝ point - Expenditure Method: consumption, investment, government spending NOTE: Neither value added nor the sum of all final goods and services is an acceptable answer to part (b). Both are unrelated to the circular flow diagram.
Part (c): 2 points
The components of aggregate demand are consumption, investment, and government spending. If net exports are included in the determinants of AD, the answer should not be discredited. The determinants of aggregate supply are labor demand, labor supply, and production function OR input prices, productivity, taxes, and government regulation OR resources and production function (productivity). To get full credit for AS there must be some indication of resources and the production function.
1 point - Aggregate demand components 1 point - Aggregate Supply determinants
˝ point - for resources ˝ point - for production function
3. Grading Rubric for #3: 5 Points
Part (a): 2 points
1 point -
- ˝ for specific expansionary policy tool;
- ˝ point for explanation of the effect on price and output
Expansionary monetary policy (purchasing bonds, decreasing the discount rate, decreasing reserve requirements): increase in Ms => decrease the interest rate => increases investment and/or consumption => increases in aggregate demand => increases in the price level and the equilibrium level of output.
Notes:
- Asserting the results for price and output is not acceptable. Incorporating all of the linkages between policy and price and output results is not as important in this question because this is a short question and the emphasis is on international. Thus, having the correct expansionary policy resulting in an increase in aggregate demand which in turn results in increases in price and output is acceptable.
- [Alternative answers based on Monetarists or Rational Expectations views will be accepted.]
1 point - Expansionary fiscal policy: increase in government spending (decrease in taxes) => increase in aggregate demand => increase in prices and output. [˝ for specific expansionary policy action; ˝ point for effect on price and output]
Part (b): 1 point
An increase in domestic prices will change the relative prices between domestic and foreign goods; domestic goods will be relatively more expensive thus decreasing the level of exports and increasing the level of imports.
˝ point - for direction of effects on imports and exports. ˝ point - for explanation which must include relative prices.
Part (c): 1 point
The increase in income increases the demand for imports, assuming imports are normal goods. No reason to expect exports to change.
˝ point - for direction of effect on imports. ˝ point - for explanation.
Part (d): 1 point
The net effect of the price and output increases results in a depreciation of the international value of the dollar.
˝ point - for direction of effects on international value of the dollar. ˝ point - for explanation. If score comes to a half point and
- the student recognizes that exports are unchanged in part (c), then round up the answer to the next grade; OR
- the student gets credit for either part (b) or part (c), then the score should be rounded up.
- neither (i) nor (ii) applies, then use holistic approach.