Let's be real for a second. You’ve spent months drawing the same Aggregate Demand and Aggregate Supply curves. You can probably sketch a Phillips Curve in your sleep. But then you hit the Unit 5 AP Macroeconomics FRQ section on a practice exam and suddenly, the "Long-Run Consequences of Fiscal Policy" feels like a personal attack. It's frustrating. It's dense.
Unit 5 is where the College Board stops asking you what happens now and starts asking what happens later. It's about the long run. It’s about the "crowding out" effect that everyone thinks they understand until they have to explain it on paper with a loanable funds graph. If you're staring at a prompt about the Phillips Curve or the relationship between the deficit and real interest rates, you aren't alone in feeling a bit of dread. This is the unit that separates the 4s from the 5s because it requires you to connect three or four different concepts in a single chain of logic. One wrong link and the whole FRQ falls apart.
The Crowding Out Chaos
Most students lose points on the unit 5 AP macroeconomics FRQ because they forget the loanable funds market. Seriously. When the government spends more than it takes in—a budget deficit—they have to borrow that money. They go to the loanable funds market just like a business or a person would.
This increases the demand for loanable funds. You know what happens next. The real interest rate goes up. But here is the part that kills your score if you miss it: that high interest rate scares off private investment.
Think about it this way. If a tech company wanted to build a new factory, they might change their mind if the interest rate jumps from 4% to 8%. The government "crowded out" the private sector. On an FRQ, you can't just say "investment goes down." You have to specify interest-sensitive private investment. If you leave out that "interest-sensitive" part, or if you don't explicitly link it to the change in the interest rate, you're leaving points on the table. It’s about the chain of causality.
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The Phillips Curve: Short Run vs. Long Run
The Phillips Curve is another staple of the unit 5 AP macroeconomics FRQ. It’s the visual representation of the trade-off between inflation and unemployment. In the short run, it makes sense: if the economy is booming, inflation is high but unemployment is low. If we're in a recession, it's the opposite.
But then the long run kicks in.
The Long-Run Phillips Curve (LRPC) is a vertical line. It lives at the Natural Rate of Unemployment (NRU). A common mistake is thinking that fiscal or monetary policy can shift the LRPC. It usually doesn't. Unless the prompt mentions something fundamental changing—like labor force productivity or structural changes in the job market—that vertical line stays put.
If the government uses expansionary policy, you move up and to the left along the Short-Run Phillips Curve (SRPC). You don't shift the curve itself yet. Shifting the SRPC only happens when inflation expectations change or when there’s a supply shock. If you get a question about "stagflation," you’re shifting that SRPC to the right. Higher inflation and higher unemployment. It’s the worst of both worlds and a favorite topic for FRQ writers because it forces you to think outside the standard "AD moves things" box.
Money Growth and the Quantity Theory
Let's talk about the formula that looks too simple to be important: $MV = PY$.
The Quantity Theory of Money. In many unit 5 AP macroeconomics FRQ prompts, you'll be asked about the long-term impact of increasing the money supply. If the velocity of money ($V$) and the real output ($Y$) are constant, then increasing the money supply ($M$) leads directly to an increase in the price level ($P$).
It's literally just inflation.
Often, the FRQ will ask you to explain this without using the math. You have to be able to say that in the long run, the economy is at full employment. Therefore, printing more money doesn't make more "stuff." It just makes the "stuff" we have more expensive. If you can explain that the "neutrality of money" means that changes in the money supply don't affect real variables (like real GDP) in the long run, you’re golden.
Deficits, Debt, and the Future
There is a massive difference between a deficit and debt. I see people swap these terms all the time. A deficit is a yearly shortfall. The debt is the total accumulation of all those shortfalls over time.
Why does this matter for your FRQ? Because the College Board loves to ask how a national debt affects long-run economic growth.
If the government is constantly in debt, they are constantly borrowing. As we discussed, that keeps interest rates high. High interest rates mean less investment in physical capital (machines, tools, factories). Less physical capital means lower productivity. Lower productivity means the Long-Run Aggregate Supply (LRAS) curve shifts to the right more slowly than it otherwise would.
Basically, today's debt can stunt tomorrow's growth.
Economic Growth: The Holy Grail of Unit 5
What actually makes an economy grow in the long run? It’s not spending. It’s not "printing money." It’s productivity.
When you see a unit 5 AP macroeconomics FRQ ask about "long-run economic growth," you should immediately think of three things:
- Physical Capital: Better tools and infrastructure.
- Human Capital: Education and training. Better workers.
- Technology: Better ways of doing things.
If a government provides a tax credit for business investment, they are encouraging the creation of physical capital. This shifts the LRAS to the right. It also shifts the Production Possibilities Curve (PPC) outward. If you are asked to show economic growth on a graph, those are your two options. Don't just shift the AD curve and call it a day. AD is a temporary boost; LRAS is permanent growth.
Navigating the Nuance of Public Policy
One of the trickiest parts of these FRQs is the "Balanced Budget Multiplier."
Suppose the government increases spending by $10 billion but also increases taxes by $10 billion to pay for it. Most people think the effect is zero. It’s not. Because people would have saved some of that $10 billion if they had kept it, the tax hike doesn't pull as much out of the economy as the spending puts in.
The multiplier for government spending is always larger than the tax multiplier.
This means a balanced-budget increase in spending is actually expansionary. It’s a tiny detail, but it’s exactly the kind of thing that shows up in part (c) or (d) of a long FRQ to catch you off guard.
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Real World Examples and Experts
Economists like Milton Friedman famously argued that "inflation is always and everywhere a monetary phenomenon." This is the heart of Unit 5. When you look at historical data from the 1970s, you see exactly what the Phillips Curve describes—a period where expectations of inflation started to rise, shifting the SRPC upward and creating a cycle that was incredibly hard to break.
On the flip side, look at the debate over modern infrastructure bills. Proponents argue that the debt taken on today is worth it because it builds the "Human Capital" and "Physical Capital" necessary to shift the LRAS right. Critics point to the "Crowding Out" effect, fearing that government borrowing will starve private startups of the loans they need to innovate.
Understanding these two sides makes writing the FRQ easier because you aren't just memorizing lines on a graph; you're describing a real-world tug-of-war.
Practical Steps for Mastering the FRQ
Don't just read the textbook. That's a trap.
Start by pulling the last five years of released FRQs from the College Board website. Look specifically at the "Scoring Guidelines." Notice how they want you to phrase things. They have a very specific "economic language." Use words like "marginal propensity to consume," "real interest rate," and "natural rate of unemployment."
When you practice, draw the graphs. Don't just visualize them. Actually draw the Loanable Funds market next to the AD/AS model. See how a shift in one affects the other.
Check your labels. A "Price Level" is not the same as an "Interest Rate." Labeling the vertical axis of a Loanable Funds graph as "Price Level" is an instant point deduction. It happens to the best of us when we're in a hurry.
Finally, remember that Unit 5 is about connections. Every action has a reaction. If the government changes a tax, follow the money. Where does it go? Does it affect consumption? Does it affect the deficit? Does it affect interest rates? Does that affect investment? Does that affect the LRAS? If you can trace that path, you've mastered the most difficult part of the course.
Stop worrying about memorizing every single definition and start focusing on the "why." Why does the interest rate rise? Why does the LRPC stay vertical? Once the "why" clicks, the FRQ becomes a lot less scary. You’ve got this. Just keep drawing those curves.
To solidify this, your next move should be to take a blank sheet of paper and try to link a "decrease in personal income taxes" all the way to "long-run economic growth" using at least three different graphs. If you can do that without looking at your notes, you're ready for the exam.