Victoria Spiegel

AP Macroeconomics 5.3 AP Free Response Assignment

The following is a free response question released by the College Board from a previous AP exam to be used as practice for future exams. You can complete the assignment in this document, using the drawing tools in Word (or any photo editing program) or print this document, and complete the activity by hand, submitting a scan or photo of your work. When you are done, submit the assignment for grading by your instructor. This question will be graded out of 7 points. 1. The unemployment rate is an important indicator of the health of the United States economy. (a) Assume that with the economy at full employment, the government implements an expansionary fiscal policy. How does the actual unemployment rate at the new short-run equilibrium compare with the natural rate of unemployment? The actual unemployment rate at the new short-run equilibrium will be lower than the natural rate of unemployment. (b) Assume that a significant number of workers are involuntarily changed from full-time to part-time employment. Explain how this will affect the number of people who are officially classified as unemployed. The number of people who are officially classified as unemployed will not change, because part time workers, even if they would rather be working full time, are not considered unemployed. Underemployed workers arent counted as unemployed, so the official number of unemployed workers remains the same. (c) Assume that the government reduces the level of unemployment compensation. (i) Explain how this affects the natural rate of unemployment. The natural rate of unemployment will decrease. More people will look for jobs because of the reduced unemployment compensation, leading to a lower natural rate of unemployment. (ii) Using a correctly labeled graph, show how this affects the long-run Phillips curve. The long-run Phillips curve will shift the left because of the lower natural rate of unemployment.

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