These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD); all data are fictional. The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Assumptions: GDP figures are real (constant prices) unless labelled nominal; a four-function calculator is enough; round percentages to 2 decimal places.
Question 1 (multiple choice · foundation)
Which of the following marks the end of a recession?
- (A) A peak
- (B) A trough
- (C) An expansion
- (D) A positive output gap
Answer and explanation
Answer: (B). A trough is the turning point where real GDP stops falling and starts to rise, so the recession ends there.
- (A) A peak ends an expansion and starts a recession.
- (C) An expansion is a phase, not a turning point. It begins after the trough.
- (D) The gap compares output with potential. A recession usually ends with a negative gap, because output is at its lowest.
Question 2 (multiple choice · core)
The graph shows Valdoria’s actual real GDP (solid curve) and potential real GDP (dashed line) over time. Five points, V to Z, are marked on the actual GDP curve.
At which point is Valdoria’s unemployment rate below the natural rate of unemployment?
- (A) Point W
- (B) Point X
- (C) Point Y
- (D) Point Z
Answer and explanation
Answer: (A). At W, actual real GDP is above potential, a positive output gap. Firms are producing beyond full-employment output, so unemployment is below the natural rate.
- (B) X lies on the potential line. Output equals potential, so unemployment equals the natural rate, even though the economy is in recession there.
- (C) Y is below the line (negative gap), so unemployment is above the natural rate.
- (D) Z is in an expansion, but output is still below potential, so unemployment is still above the natural rate.
Question 3 (multiple choice · core)
Valdoria’s actual real GDP is VD 760 billion and its potential real GDP is VD 800 billion. Which statement is correct?
- (A) The output gap is +VD 40 billion, an inflationary gap.
- (B) The output gap is −VD 40 billion, which is 5.00% of potential output.
- (C) The output gap is −VD 40 billion, which is 5.26% of potential output.
- (D) The output gap is −VD 40 billion, so unemployment is below the natural rate.
Answer and explanation
Answer: (B). Gap = 760 − 800 = −40. As a percentage of potential: −40 ÷ 800 × 100 = −5.00%.
- (A) reverses the subtraction. Actual output is below potential, so the gap is negative (recessionary).
- (C) divides by actual output (40 ÷ 760 × 100 = 5.26%). The gap is measured relative to potential output.
- (D) reverses the link. Output below potential means unemployment is above the natural rate.
Question 4 (multiple choice · core)
Valdoria’s real GDP growth rate falls from 4% last year to 1% this year. Which statement is correct about this year?
- (A) Valdoria is in a recession because growth fell by 3 percentage points.
- (B) Valdoria has reached a trough.
- (C) Valdoria is still in an expansion because real GDP is still rising.
- (D) Real GDP fell by 3%.
Answer and explanation
Answer: (C). A growth rate of 1% is positive, so real GDP is still rising. Rising real GDP is an expansion, even if it is slower than before.
- (A) confuses a fall in the growth rate with a fall in real GDP. A recession needs negative growth.
- (B) A trough is where real GDP stops falling. Real GDP has not been falling here.
- (D) subtracts the growth rates. Real GDP actually rose by 1%.
Question 5 (calculation · core)
Valdoria’s real GDP (VD billion, constant prices) over eight quarters:
| Quarter | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
|---|---|---|---|---|---|---|---|---|
| Real GDP | 250 | 254 | 257 | 255 | 251 | 248 | 249 | 253 |
(a) Identify the quarter of the peak and the quarter of the trough. (b) Identify the quarters in which Valdoria was in recession. (c) Calculate the percentage change in real GDP from the peak to the trough.
Worked solution
(a) Peak: Quarter 3 (257, highest before real GDP falls). Trough: Quarter 6 (248, lowest before real GDP rises).
(b) Real GDP falls in Quarters 4, 5 and 6 (255, 251, 248), so these are the recession quarters. Quarters 7 and 8 are an expansion.
(c) (248 − 257) ÷ 257 × 100 = −3.50%.
Suggested mark points (3): 1 for both turning points; 1 for the recession quarters; 1 for −3.50% using 257 as the denominator. Accept “Quarters 3 to 6” for the recession only if the answer makes clear that real GDP falls after Quarter 3.
Question 6 (constructed response · core)
Valdoria publishes these annual figures. Year 1 is the base year.
| Year | Nominal GDP (VD billion) | GDP deflator |
|---|---|---|
| 1 | 600.00 | 100 |
| 2 | 642.72 | 104 |
| 3 | 673.20 | 110 |
| 4 | 705.60 | 112 |
(a) Calculate real GDP in each year. (b) Identify the year of the peak and the year in which Valdoria was in recession. Support your answer with growth rates. (c) A news report says, “Nominal GDP rose every year, so there was no recession.” Explain why the report is wrong.
Worked solution and suggested Marlbridge rubric
(a) Real GDP = nominal ÷ deflator × 100. Year 1: 600. Year 2: 642.72 ÷ 104 × 100 = 618. Year 3: 673.20 ÷ 110 × 100 = 612. Year 4: 705.60 ÷ 112 × 100 = 630 (all VD billion).
(b) Real growth: Year 2 = (618 − 600) ÷ 600 × 100 = 3.00%; Year 3 = (612 − 618) ÷ 618 × 100 = −0.97%; Year 4 = (630 − 612) ÷ 612 × 100 = 2.94%. Real GDP peaks in Year 2 and falls in Year 3, the recession year. Year 3 is also the trough; Year 4 is an expansion.
(c) Nominal GDP rises when prices rise, even if output falls. In Year 3 nominal GDP rose by 4.74%, but the deflator rose from 104 to 110 (5.77%), so the quantity of output fell. A recession is a fall in real GDP, which did happen in Year 3.
| Point | What earns it |
|---|---|
| 1 | All four real GDP values correct |
| 1 | Peak in Year 2, supported by real growth figures |
| 1 | Recession in Year 3, supported by negative real growth |
| 1 | Explains that nominal GDP includes price rises, so it can rise while output falls |
Accept values carried forward from an error in (a). In (c), stating “use real GDP” without explaining why earns no point.
Question 7 (constructed response · stretch)
Valdoria’s potential real GDP is VD 500 billion and its natural rate of unemployment is 5.0%. This year actual real GDP is VD 520 billion and the unemployment rate is 3.8%.
(a) Calculate the output gap in VD billion and as a percentage of potential output. Name the type of gap. (b) Calculate cyclical unemployment. (c) Explain how unemployment can be below the natural rate. (d) Households become pessimistic and cut their spending sharply. Assuming nothing else changes, explain what is likely to happen to real GDP and unemployment, and identify the phase of the business cycle the economy would enter.
Model answer and suggested Marlbridge rubric
(a) 520 − 500 = +VD 20 billion; 20 ÷ 500 × 100 = +4.00%. This is a positive (inflationary) gap.
(b) 3.8% − 5.0% = −1.2 percentage points.
(c) Potential output is not a physical maximum. When output is above potential, firms meet the extra demand by hiring more workers and using overtime and extra shifts. Some people who would normally be between jobs or retraining find work quickly, so unemployment falls below its natural (frictional + structural) level for a time.
(d) Lower consumer spending is a decrease in aggregate demand. Firms sell less, so they cut production: real GDP falls. They need fewer workers, so unemployment rises and cyclical unemployment increases. Because real GDP is falling, the economy moves past a peak into a recession.
| Point | What earns it |
|---|---|
| 1 | +VD 20 billion and +4.00%, named as a positive or inflationary gap |
| 1 | Cyclical unemployment of −1.2 points |
| 1 | Explains that output above potential lets unemployment fall below the natural rate (extra hiring, overtime) |
| 1 | Identifies the fall in spending as a decrease in aggregate demand, so real GDP falls and unemployment rises |
| 1 | Identifies a recession (after a peak), linked to falling real GDP |
In (d), the AD–AS graph is not required here; you will model this shift in Unit 3.
How did you do?
- Q1 or Q4 wrong: re-read “Phases and turning points” in the study guide.
- Q2 wrong: practise the four-step routine in “Reading a business cycle graph”.
- Q3 or Q7(a)–(b) wrong: revisit “Potential output and the output gap” and Worked example 2.
- Q5 wrong: revisit Worked example 1, parts (a) to (c).
- Q6 wrong: revisit real GDP in Topic 2.6, then the misconception about nominal GDP.
- Q7(c)–(d) wrong: re-read “Output does not grow smoothly” and Worked example 2(b).
Then tick off the topic checklist.