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: real GDP is in billions of valdas at base-year prices; “other things equal” applies unless a question says otherwise.
Question 1 (multiple choice · foundation)
Valdoria’s price level rises. Households find that the money in their savings accounts now buys fewer goods, so they reduce their spending. Which concept does this describe?
- (A) The interest rate effect
- (B) The real wealth effect
- (C) The exchange rate effect
- (D) A decrease in aggregate demand
Answer and explanation
Answer: (B). A higher price level lowers the purchasing power of money holdings and savings. Households feel poorer and cut consumption. This is the real wealth effect, one reason the AD curve slopes downward.
- (A) works through borrowing costs: a higher price level raises the demand for money and interest rates, which lowers investment. The question is about the value of savings, not borrowing.
- (C) works through the currency and net exports, which the question does not mention.
- (D) is wrong because the price level caused the change. That is a fall in the quantity of real GDP demanded, a movement along AD, not a shift.
Question 2 (multiple choice · core)
Which event, on its own, shifts Valdoria’s aggregate demand curve to the left?
- (A) A fall in Valdoria’s price level
- (B) A rise in consumer confidence about future jobs
- (C) A recession in Valdoria’s largest trading partner
- (D) A cut in the tax rate on business profits
Answer and explanation
Answer: (C). Lower incomes abroad mean foreign buyers purchase fewer Valdorian exports. Net exports fall at every price level, so AD shifts left.
- (A) is a change in the price level, which causes a movement down along AD (more real GDP demanded), not a shift.
- (B) raises consumption at every price level, so AD shifts right.
- (D) makes new investment more profitable, so investment rises and AD shifts right.
Question 3 (multiple choice · core)
All else equal, which statement correctly describes the effect of a rise in Valdoria’s price level?
- (A) The AD curve shifts left, so real GDP demanded falls.
- (B) There is a movement up along the AD curve, and the quantity of real GDP demanded falls.
- (C) The AD curve shifts right, because spending in valdas rises.
- (D) There is a movement down along the AD curve, and the quantity of real GDP demanded rises.
Answer and explanation
Answer: (B). The price level is on the vertical axis. A change in it moves the economy along the existing curve. Moving up the downward-sloping curve means less real GDP is demanded.
- (A) treats a price-level change as a shifter. The curve itself does not move.
- (C) confuses nominal spending with real GDP. The horizontal axis measures real output, which falls.
- (D) gets the direction wrong: a higher price level is a movement up the curve, to less real GDP.
Question 4 (multiple choice · stretch)
Which sequence correctly describes the exchange rate effect when Valdoria’s price level rises?
- (A) Interest rates rise → foreign savers buy Valdorian assets → the valda appreciates → exports fall and imports rise → net exports fall
- (B) Interest rates fall → the valda depreciates → exports rise → net exports rise
- (C) Real wealth falls → households buy fewer imports → net exports rise
- (D) The valda depreciates → Valdorian goods become dearer abroad → exports fall
Answer and explanation
Answer: (A). A higher price level raises the demand for money and so interest rates. Higher returns attract foreign savers, who must buy valdas; the valda appreciates. Valdorian goods become dearer for foreigners and imports become cheaper, so net exports fall: a movement up along AD.
- (B) reverses the interest rate change. A higher price level raises interest rates.
- (C) does not involve the exchange rate at all, so it cannot describe the exchange rate effect. Its result is also wrong: through this channel a higher price level lowers net exports, it does not raise them.
- (D) is internally inconsistent: a depreciation makes Valdorian goods cheaper abroad, not dearer.
Question 5 (calculation · core)
The table shows Valdoria’s AD schedule before and after an event (VD billion).
| Price level | Real GDP demanded: original | Real GDP demanded: new |
|---|---|---|
| 105 | 760 | 790 |
| 115 | 740 | 770 |
| 125 | 720 | 750 |
(a) On the original schedule, calculate the change and the percentage change in the quantity of real GDP demanded when the price level rises from 105 to 125. (b) Compare the two schedules. State the direction and size of the change in AD. (c) Identify one event involving consumption that could explain the change in (b).
Worked solution
(a) 720 − 760 = −VD 40 billion. Percentage change = −40 ÷ 760 × 100 = −5.26%. This is a movement along the original AD curve.
(b) At every price level, real GDP demanded is VD 30 billion higher (790 − 760 = 770 − 740 = 750 − 720 = 30). AD has increased: the curve shifted right by VD 30 billion.
(c) Any change that raises consumption at every price level, for example: a rise in share or house prices (more household wealth), higher consumer confidence, a cut in personal income tax, or higher transfer payments.
Suggested mark points (3): 1 for −40 and −5.26% (dividing by 760, the starting value); 1 for a rightward shift of 30 at every price level; 1 for a valid consumption shifter not linked to the price level. “Prices fell” does not earn the third point: that is a movement, not a shift.
Question 6 (constructed response · core)
Households in Valdoria have taken on record levels of debt, and banks report that many families are cutting back to repay loans.
(a) Draw a correctly labelled AD graph for Valdoria. Label the original curve AD₁. (b) On your graph, show the effect of the cutback in household spending. Label the new curve AD₂. (c) Identify the component of aggregate demand affected and explain why the curve moves the way you drew it. (d) After this change, Valdoria’s price level falls. Using the interest rate effect, explain what happens to the quantity of real GDP demanded.
Worked solution and suggested Marlbridge rubric
(a)–(b) Vertical axis: Price level (PL). Horizontal axis: Real GDP (Y). A downward-sloping AD₁, and AD₂ drawn to the left of AD₁.
(c) Consumption falls. Households use more of their income to repay debt, so they buy fewer goods and services at every price level. Because the fall is not caused by a change in the price level, the whole AD curve shifts left.
(d) A lower price level means people need less money for their purchases, so the demand for money falls and interest rates fall. Borrowing is cheaper, so investment rises (and interest-sensitive consumption). The quantity of real GDP demanded rises: a movement down along AD₂.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes (Price level, Real GDP) with a downward-sloping AD₁ |
| 1 | AD₂ drawn to the left of AD₁ |
| 1 | Identifies consumption and explains that spending falls at every price level |
| 1 | Chain in (d): lower price level → lower interest rates → higher investment |
| 1 | Concludes that the quantity of real GDP demanded rises along AD₂ (not a shift) |
Axes labelled “Price” and “Quantity” do not earn the first point. In (d), “AD shifts right” does not earn the last point.
Question 7 (constructed response · stretch)
In the same year, three things happen in Valdoria:
- The central bank raises its policy interest rate to cool borrowing.
- Valdoria’s price level rises by 3%.
- The government increases spending on hospitals by VD 15 billion at every price level, while exports fall by VD 25 billion at every price level.
(a) Explain why the central bank’s interest rate rise shifts AD, but a rise in interest rates caused by the higher price level does not. (b) State the effect of the 3% rise in the price level on the AD curve. (c) Considering only the change in government spending and the change in exports, state whether AD shifts right or left. Explain.
Model answer and suggested Marlbridge rubric
(a) The policy rise is not caused by the price level. It makes borrowing dearer at every price level, so investment falls at every price level and AD shifts left. When the price level itself rises, the higher demand for money pushes interest rates up and investment falls, but this is the interest rate effect: it is already built into the slope of AD, so the economy moves along the curve.
(b) No shift. The economy moves up along AD; the quantity of real GDP demanded falls through the wealth, interest rate and exchange rate effects.
(c) Government spending adds VD 15 billion, but net exports fall by VD 25 billion. The first change in spending at every price level is 15 − 25 = −VD 10 billion, so AD shifts left. (Topic 3.2 shows the final shift is larger than 10, but the direction is the same.)
| Point | What earns it |
|---|---|
| 1 | Policy rate rise lowers investment at every price level, so AD shifts left |
| 1 | Price-level-driven rise in interest rates is the interest rate effect: a movement along AD |
| 1 | (b) Movement up along AD, no shift |
| 1 | (c) Net change of −10 with conclusion: AD shifts left |
In (c), “AD shifts right because G rose” earns nothing: both changes must be compared.
How did you do?
- Q1, Q4 or Q6(d) wrong: re-read “Why the AD curve slopes downward” in the study guide.
- Q2, Q6(c) or Q7 wrong: revisit “What shifts the AD curve” and Worked example 1.
- Q3 or Q5 wrong: revisit Worked example 2 and Figure 1 on movements versus shifts.
- Q6(a)–(b) wrong: check the axis labels in “The axes” and Figure 2.
Then tick off the topic checklist.