Practice a College Board-style free response question on National Income & Price Determination. Write your response, then reveal the model answer to see exactly what earns each point.
Free Response Question · Unit 3 · AD/AS, the Multiplier & Fiscal Policy
The economy of Castellan is currently producing real GDP that is below its potential (full-employment) GDP, creating a recessionary gap. Economists estimate Castellan's marginal propensity to consume (MPC) is 0.8.
A
Calculate Castellan's spending multiplier. Show your work.
Why it scores: Correctly finds MPS first, then applies the spending multiplier formula, and arrives at the correct numeric value (5). Skipping the MPS step is a common source of errors.
B
Suppose Castellan's government increases spending by $4 billion to close the recessionary gap. Using your answer from Part A, calculate the total change in real GDP, assuming no crowding out.
✓ Model answer (earns the point)
Total change in real GDP = initial change in spending × spending multiplier = $4 billion × 5 = $20 billion.
Why it scores: Correctly multiplies the initial spending change by the multiplier from Part A and labels the answer with units ($20 billion). Using the tax multiplier or forgetting units would not earn full credit.
C
Using a correctly labeled AD/AS graph in words, describe what happens to the price level and real GDP as a result of this increase in government spending. Then explain one limitation (such as crowding out) that could make the actual increase in real GDP smaller than your answer in Part B.
✓ Model answer (earns the point)
The increase in government spending shifts the aggregate demand (AD) curve to the right. At the new intersection with the short-run aggregate supply (SRAS) curve, both the price level rises and real GDP increases, moving the economy closer to potential GDP (LRAS) and helping close the recessionary gap. However, the actual increase in real GDP is likely to be smaller than the $20 billion calculated in Part B because of crowding out: the increased government borrowing needed to finance the higher spending raises interest rates, which discourages some private investment spending. This reduction in investment partially offsets the initial increase in government spending, so the rightward shift of AD — and the resulting increase in real GDP — ends up smaller than the simple multiplier calculation predicts.
Why it scores: Correctly identifies the AD shift and its effect on both price level and real GDP, AND names and explains a specific limitation (crowding out) with the causal mechanism (higher borrowing → higher interest rates → lower investment). Simply naming "crowding out" without the mechanism would earn partial credit at best.
How to score points on AP Macroeconomics FRQs
Show every step of multiplier calculations. Find MPS before the multiplier, and label which multiplier (spending vs. tax) you're using.
Always describe both axes when discussing an AD/AS shift. A shift in AD or AS affects both the price level AND real GDP — name both directions.
When asked for a limitation, name the mechanism, not just the term. "Crowding out" alone is vague; explain how higher borrowing → higher interest rates → lower investment.
Label your units and round appropriately. "$20" is not the same as "$20 billion" to an AP grader.
Multi-part questions build on each other. Make sure later parts are consistent with your earlier calculations.