These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria and Kestria, fictional countries 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: “the short run” means a period in which nominal wages and some other input prices are fixed; a four-function calculator is enough; round percentages to 1 decimal place.
Question 1 (multiple choice · foundation)
Which of the following best explains why the short-run aggregate supply curve slopes upward?
- (A) When the price level rises, households feel poorer and buy less, so firms produce more for export.
- (B) When the price level rises, nominal wages and some other input prices are slow to adjust, so producing more becomes profitable.
- (C) When the price of one good rises, producers move resources into making that good.
- (D) When the price level rises, nominal wages rise by the same percentage straight away.
Answer and explanation
Answer: (B). Sticky input prices mean that a higher price level raises the gap between what firms receive and what they pay per unit, so they expand output.
- (A) mixes in the real wealth effect, which explains the slope of AD, not SRAS, and the story about exports does not follow.
- (C) is the law of supply for a single market. SRAS uses the price level of all goods, so moving resources between goods cannot explain it.
- (D) describes fully flexible wages. If wages rose at once by the same percentage, firms would have no reason to produce more; that is the long-run case in Topic 3.4.
Question 2 (multiple choice · core)
Which of the following would shift Valdoria’s short-run aggregate supply curve to the left?
- (A) An increase in Valdoria’s price level
- (B) A rise in the inflation rate that workers and firms expect next year
- (C) An increase in consumer confidence
- (D) A fall in the world price of fuel used by Valdorian firms
Answer and explanation
Answer: (B). Higher expected inflation leads workers to bargain for higher nominal wages. Costs rise at every level of output, so SRAS decreases (shifts left).
- (A) is a change in the price level, which causes a movement along SRAS, not a shift.
- (C) raises consumption spending, which shifts AD to the right; SRAS does not change.
- (D) lowers production costs, which shifts SRAS to the right.
Question 3 (multiple choice · core)
Kestria’s labour force is constant. Its economy moves up along its short-run aggregate supply curve to a higher price level. Which row shows the short-run effects?
- (A) Real output rises, employment rises, the unemployment rate falls
- (B) Real output rises, employment falls, the unemployment rate rises
- (C) Real output stays the same, employment stays the same, the unemployment rate stays the same
- (D) Real output falls, employment falls, the unemployment rate rises
Answer and explanation
Answer: (A). Moving up SRAS, firms supply more output. More output needs more workers, so employment rises; with a fixed labour force, fewer people are unemployed and the unemployment rate falls.
- (B) cannot happen: firms cannot produce more with fewer workers in this model.
- (C) describes the long run, where the aggregate supply curve is vertical. Along SRAS, output changes with the price level.
- (D) describes a movement down SRAS to a lower price level.
Question 4 (multiple choice · core)
Kestria’s SRAS schedule is shown below (real GDP in VD billion).
| Price level | 95 | 100 | 105 | 110 |
|---|---|---|---|---|
| Real GDP supplied | 600 | 630 | 660 | 690 |
New technology raises productivity, so Kestrian firms supply VD 45 billion more at every price level. How much real GDP is supplied at a price level of 105 after the change?
- (A) VD 615 billion
- (B) VD 660 billion
- (C) VD 690 billion
- (D) VD 705 billion
Answer and explanation
Answer: (D). Higher productivity lowers cost per unit, so SRAS increases: 660 + 45 = VD 705 billion at a price level of 105.
- (A) shifts the curve the wrong way: 660 − 45 = 615. A productivity gain is an increase, not a decrease.
- (B) is the output before the change; it ignores the shift.
- (C) is the output on the original curve at a price level of 110: a movement along SRAS, not a shift.
Question 5 (constructed response · core)
Energy prices rise sharply in Valdoria, and the higher prices are expected to last for some time. Assume nothing else changes.
(a) Draw a correctly labelled graph of Valdoria’s short-run aggregate supply curve. Show the effect of the rise in energy prices. Label the original curve SRAS₁ and the new curve SRAS₂. (b) Explain why the curve shifts in the direction you showed. (c) At the original price level, what happens to the quantity of real output firms are willing to supply?
Model answer and suggested Marlbridge rubric
(a) Vertical axis: Price level (PL). Horizontal axis: Real GDP (or real output). An upward-sloping SRAS₁, and SRAS₂ drawn to the left (above) of SRAS₁, with an arrow showing the shift.
(b) Energy is an input for almost all firms. When its price rises, the cost of producing each unit of output rises. At any given price level, producing the same output is now less profitable, so firms supply less. SRAS decreases (shifts left).
(c) At the original price level, the quantity of real output supplied falls (read across from the price level to SRAS₂, which is to the left).
| Point | What earns it |
|---|---|
| 1 | Axes labelled price level and real GDP (or real output), with an upward-sloping SRAS₁ |
| 1 | SRAS₂ drawn to the left of SRAS₁ |
| 1 | Explanation that higher input costs raise the cost of producing each unit of output |
| 1 | Real output supplied falls at the original price level |
Axes labelled “Price” and “Quantity” do not earn the first point. Describing the shift as “up” instead of “left” is fine if the graph is correct.
Question 6 (constructed response · core)
Kestria’s labour force is 12.0 million and does not change. The table shows two points on Kestria’s SRAS curve.
| Point | Price level | Real GDP supplied (VD billion) | Employed (million) |
|---|---|---|---|
| J | 120 | 450 | 11.16 |
| K | 126 | 480 | 11.40 |
(a) Calculate the inflation rate if the economy moves from J to K. (b) Calculate the unemployment rate at J and at K. (c) Explain why employment must rise when the economy moves from J to K. (d) Use your answers to describe the relationship between inflation and unemployment along the SRAS curve.
Worked solution and suggested Marlbridge rubric
(a) (126 − 120) ÷ 120 × 100 = 6 ÷ 120 × 100 = 5.0%.
(b) At J: unemployed = 12.0 − 11.16 = 0.84 million; rate = 0.84 ÷ 12.0 × 100 = 7.0%. At K: unemployed = 12.0 − 11.40 = 0.60 million; rate = 0.60 ÷ 12.0 × 100 = 5.0%.
(c) Real output rises from VD 450 billion to VD 480 billion. Producing VD 30 billion more output needs more labour, so firms hire more workers (0.24 million more).
(d) Moving from J to K, the price level rises (5.0% inflation) and the unemployment rate falls from 7.0% to 5.0%. Along the SRAS curve, higher inflation goes with lower unemployment: a short-run trade-off.
| Point | What earns it |
|---|---|
| 1 | Inflation rate of 5.0%, dividing by 120 |
| 1 | Both unemployment rates correct (7.0% and 5.0%) |
| 1 | Links more output to more workers needed |
| 1 | States the trade-off: higher inflation with lower unemployment, in the short run |
Accept values carried forward from an earlier error. Using employment as the denominator (0.84 ÷ 11.16) is wrong: the unemployment rate divides by the labour force.
Question 7 (constructed response · stretch)
(a) For each event, state whether Valdoria’s SRAS curve shifts left, shifts right, does not shift but the economy moves along it, or is unaffected because the event affects AD. Give a one-line reason for each.
- A drought destroys a large part of the rice harvest.
- Workers and firms come to expect lower inflation, and new wage agreements are lower than before.
- The government cuts the income tax paid by households.
- The price level falls while nominal wages stay the same.
(b) A Valdorian factory pays a nominal wage of VD 18 an hour, fixed by a two-year contract. During the contract the price level rises from 100 to 112.5. Calculate the real wage in base-period valdas after the rise, and use it to explain why the factory is likely to increase its output.
Model answer and suggested Marlbridge rubric
(a)
- Shifts left. A supply shock: less output is available at every price level, and the cost of food inputs rises.
- Shifts right. Lower expected inflation leads to lower wage settlements, so production costs fall at every level of output.
- Unaffected (AD shifts). Higher disposable income raises consumption, which shifts AD to the right. Firms’ costs do not change.
- Movement along SRAS (down). A change in the price level does not shift the curve. With wages fixed, lower output prices squeeze profit per unit, so firms produce less.
(b) Real wage = 18 ÷ 112.5 × 100 = VD 16.00 an hour, down from VD 18.00 (an 11.1% fall). The factory sells its output at higher prices but pays the same nominal wage, so each hour of labour costs less relative to the value of what it produces. Hiring more hours and producing more is now profitable, so output rises: a movement up along SRAS.
| Point | What earns it |
|---|---|
| 1 | Events 1 and 2 both correct with reasons |
| 1 | Event 3: AD, not SRAS, with a reason |
| 1 | Event 4: movement along, not a shift |
| 1 | Real wage of VD 16.00 |
| 1 | Explains that a lower real wage (sticky nominal wage, higher output prices) makes more output profitable |
In (a), a correct direction with no reason earns no credit for that item. In (b), “wages are sticky” alone, with no link to profit or the cost of labour, does not earn the last point.
How did you do?
- Q1 or Q7(b) wrong: re-read “Why the SRAS curve slopes upward: sticky wages and prices” in the study guide.
- Q2, Q4, Q5 or Q7(a) wrong: revisit “What shifts the SRAS curve” and Worked example 2. Check whether you confused a shift with a movement.
- Q3 or Q6 wrong: revisit Worked example 1 and the link between output, employment and unemployment.
Then tick off the topic checklist.