These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD), and its fictional neighbour Kestria; 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: the simple multiplier model applies (constant MPC, saving is the only leakage, no change in the price level); values are in billions of valdas.
Question 1 (multiple choice · foundation)
Valdoria’s marginal propensity to save is 0.25. What is the expenditure (spending) multiplier?
- (A) 0.25
- (B) 1.33
- (C) 3
- (D) 4
Answer and explanation
Answer: (D). Spending multiplier = 1 ÷ MPS = 1 ÷ 0.25 = 4.
- (A) is the MPS itself, not the multiplier.
- (B) is 1 ÷ MPC = 1 ÷ 0.75. The multiplier uses the MPS (or 1 − MPC) in the denominator.
- (C) is the size of the tax multiplier, MPC ÷ MPS = 0.75 ÷ 0.25.
Question 2 (multiple choice · core)
Valdoria’s MPC is 0.9. The government cuts taxes by VD 10 billion. What is the maximum change in aggregate demand?
- (A) An increase of VD 9 billion
- (B) An increase of VD 90 billion
- (C) An increase of VD 100 billion
- (D) An increase of VD 10 billion
Answer and explanation
Answer: (B). Tax multiplier = −MPC ÷ MPS = −0.9 ÷ 0.1 = −9. ΔAD = −9 × (−10) = +VD 90 billion.
- (A) is only the first round of spending (0.9 × 10). It ignores the later rounds.
- (C) uses the spending multiplier (10). A tax cut is not spent in full; 10% of it is saved first.
- (D) assumes there is no multiplier effect at all.
Question 3 (multiple choice · core)
When Valdoria’s disposable income rises from VD 500 billion to VD 600 billion, consumption rises from VD 450 billion to VD 530 billion. What is the MPC?
- (A) 0.20
- (B) 0.80
- (C) 0.88
- (D) 0.90
Answer and explanation
Answer: (B). MPC = ΔC ÷ ΔDI = (530 − 450) ÷ (600 − 500) = 80 ÷ 100 = 0.80.
- (A) is the MPS (1 − 0.80), the share of extra income saved.
- (C) divides total consumption by total income in the second year (530 ÷ 600 ≈ 0.88). The MPC uses changes, not totals.
- (D) does the same with the first year’s totals (450 ÷ 500).
Question 4 (multiple choice · core)
Which statement best explains why, for the same MPC, the spending multiplier is larger than the size of the tax multiplier?
- (A) Taxes are collected only once a year, so their effect is spread over a longer period.
- (B) A rise in government purchases is spent in full in the first round, but part of a tax cut is saved before any of it is spent.
- (C) Government spending raises disposable income, but a tax cut does not.
- (D) The tax multiplier uses the MPS, while the spending multiplier uses the MPC.
Answer and explanation
Answer: (B). Government purchases enter AD directly. A tax cut raises disposable income, and households spend only the MPC of it. The chain starts with a smaller first round, so the total is exactly one round smaller.
- (A) is about timing, which the multiplier model does not use.
- (C) is wrong: a tax cut raises disposable income directly; that is how it works.
- (D) misstates the formulas. Both multipliers use the MPC and MPS: 1 ÷ MPS and −MPC ÷ MPS.
Question 5 (calculation · core)
Valdoria’s MPC is 0.6. Business confidence falls and investment drops by VD 12 billion.
(a) Calculate the MPS and the spending multiplier. (b) Show the first three rounds of the change in spending and the running total after three rounds. (c) Calculate the total change in AD. (d) Calculate the total change in AD if the MPC were 0.8 instead. Explain the difference in one sentence.
Worked solution
(a) MPS = 1 − 0.6 = 0.4. Spending multiplier = 1 ÷ 0.4 = 2.5.
(b) Round 1: −12. Round 2: −12 × 0.6 = −7.2. Round 3: −7.2 × 0.6 = −4.32. Running total after three rounds: −23.52.
(c) ΔAD = 2.5 × (−12) = −VD 30 billion. AD shifts left by VD 30 billion.
(d) Multiplier = 1 ÷ 0.2 = 5, so ΔAD = 5 × (−12) = −VD 60 billion. With a higher MPC, households cut their spending by more in each round when their income falls, so the chain of lost spending is longer.
Suggested mark points (4): 1 for MPS 0.4 and multiplier 2.5; 1 for the three rounds and −23.52; 1 for −30 with a negative sign or the word “decrease”; 1 for −60 with a valid reason. Carry forward an error from (a) into (c).
Question 6 (constructed response · core)
Valdoria’s MPC is 0.8. The government wants to raise aggregate demand by VD 120 billion.
(a) Calculate the spending multiplier and the tax multiplier. (b) Calculate the increase in government spending needed, with no change in taxes. (c) Calculate the tax cut needed, with no change in government spending. (d) Explain why the answer to (c) is larger than the answer to (b). (e) A minister proposes raising government spending by the amount in (b) and raising taxes by the same amount to pay for it. Calculate the change in AD.
Worked solution and suggested Marlbridge rubric
(a) MPS = 0.2. Spending multiplier = 1 ÷ 0.2 = 5. Tax multiplier = −0.8 ÷ 0.2 = −4.
(b) 120 ÷ 5 = VD 24 billion.
(c) 120 ÷ 4 = VD 30 billion tax cut. Check: −4 × (−30) = +120 ✓.
(d) Government purchases add to AD in full in the first round. A tax cut first raises disposable income, and households save 20% of it, so only VD 0.80 of each valda is spent in the first round. To get the same total effect, the tax cut must be larger.
(e) Spending effect: 5 × 24 = +120. Tax effect: −4 × 24 = −96. Net ΔAD = 120 − 96 = +VD 24 billion.
| Point | What earns it |
|---|---|
| 1 | Both multipliers correct (5 and −4, or 4 described as a tax multiplier that lowers AD when taxes rise) |
| 1 | VD 24 billion of government spending |
| 1 | VD 30 billion tax cut |
| 1 | Explanation in (d): part of the tax cut is saved, so the first round of spending is smaller |
| 1 | Net change of +VD 24 billion in (e), showing both effects |
Accept values carried forward from an error in (a). In (e), “no change, because the budget is balanced” earns nothing.
Question 7 (constructed response · stretch)
Households in Valdoria spend 90% of any extra disposable income. Households in neighbouring Kestria spend 75% of any extra disposable income. In the same year, foreign demand for each country’s exports rises by VD 8 billion (Kestria’s figures are converted to valdas).
(a) Calculate the change in aggregate demand in each country. (b) Explain, using rounds of spending, why the same rise in exports has a larger effect in Valdoria. (c) Valdoria’s government also raises pensions (a transfer payment) by VD 8 billion. Calculate the effect on Valdoria’s AD. (d) State one reason why the actual change in Valdoria’s real GDP could be smaller than your answer to (a).
Model answer and suggested Marlbridge rubric
(a) Valdoria: MPS = 0.1, multiplier = 10, ΔAD = 10 × 8 = +VD 80 billion. Kestria: MPS = 0.25, multiplier = 4, ΔAD = 4 × 8 = +VD 32 billion.
(b) The extra export sales become income for producers and workers. In Valdoria, 90% of that income is spent again in the next round, and 90% of that the round after, so each round passes on more and the chain lasts longer before the original VD 8 billion has all leaked into saving. In Kestria only 75% is passed on each round, so the rounds shrink faster.
(c) A rise in transfers works like a tax cut: MPC ÷ MPS = 0.9 ÷ 0.1 = 9. ΔAD = 9 × 8 = +VD 72 billion.
(d) Any one of: the price level may rise as AD increases, so real GDP rises by less than the AD shift; part of the extra income may be spent on imports or paid in taxes (background leakages); the MPC may not stay constant in every round.
| Point | What earns it |
|---|---|
| 1 | Both changes in AD correct (+80 and +32) |
| 1 | Rounds explanation linking a higher MPC to more re-spending each round |
| 1 | +VD 72 billion for the transfer, using MPC ÷ MPS |
| 1 | One valid reason in (d) |
In (c), using the spending multiplier (giving 80) does not earn the point.
How did you do?
- Q1, Q3 or Q5(a) wrong: re-read “Marginal propensities” and Worked example 1 in the study guide.
- Q2, Q6(c) or Q7(c) wrong: check which multiplier you used; see “The two multipliers” and Worked example 2(b).
- Q4 or Q6(d) wrong: re-read “Why the tax multiplier is smaller”.
- Q5(b) or Q7(b) wrong: revisit the round-by-round table and Figure 1.
- Q6(b), (c) or (e) wrong: revisit Worked example 2(c)–(d) on working backwards and balanced changes.
Then tick off the topic checklist.