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 long run” means a period long enough for all wages and prices to adjust fully; a four-function calculator is enough; round percentages to 1 decimal place.
Question 1 (multiple choice · foundation)
Why is the long-run aggregate supply curve vertical?
- (A) In the long run nominal wages are fixed by contracts, so firms cannot change their output.
- (B) In the long run wages and other input prices adjust fully to the price level, so real output depends only on resources and technology.
- (C) In the long run aggregate demand stops changing, so the price level cannot affect output.
- (D) In the long run every worker is employed, so the unemployment rate is zero.
Answer and explanation
Answer: (B). Once all input prices have caught up with the price level, real costs and real profit per unit are unchanged, so firms produce the same output at any price level: the curve is vertical at Yf.
- (A) describes the short run. Fixed wages are the reason SRAS slopes upward, not the reason LRAS is vertical.
- (C) is wrong: AD can still shift in the long run. The vertical LRAS means AD changes affect the price level, not long-run output.
- (D) confuses full employment with zero unemployment. At Yf, unemployment equals the natural rate.
Question 2 (multiple choice · core)
In macroeconomics, which statement best describes the long run?
- (A) A period of at least ten years
- (B) A period in which some input prices, such as wages in contracts, cannot change
- (C) A period long enough for all wages and prices to adjust fully
- (D) A period in which only the prices of final goods can change
Answer and explanation
Answer: (C). The long run is defined by full flexibility of wages and prices, not by a number of years.
- (A) gives a calendar length. The course defines the long run by what can adjust.
- (B) is the definition of the short run.
- (D) also describes a short-run situation: output prices change while input prices are stuck.
Question 3 (multiple choice · core)
When Kestria produces at the output level where its LRAS curve is drawn, its unemployment rate equals
- (A) zero
- (B) the natural rate of unemployment
- (C) the cyclical rate of unemployment
- (D) the rate of frictional unemployment only
Answer and explanation
Answer: (B). LRAS is at full-employment output, where cyclical unemployment is zero and unemployment equals the natural rate (frictional plus structural).
- (A) ignores frictional and structural unemployment, which exist even at full employment.
- (C) is backwards: cyclical unemployment is zero at full-employment output.
- (D) leaves out structural unemployment, which is also part of the natural rate.
Question 4 (multiple choice · core)
Valdoria is producing at a point inside its production possibilities curve because many workers and machines are idle. Which statement describes the same situation in the AD–AS model?
- (A) Real GDP is below full-employment output, to the left of the LRAS curve.
- (B) Real GDP equals full-employment output, but the price level is lower.
- (C) The LRAS curve has shifted to the left.
- (D) Real GDP is above full-employment output, to the right of the LRAS curve.
Answer and explanation
Answer: (A). A point inside the PPC means unemployed resources. In the AD–AS model that is output below Yf, to the left of the vertical LRAS.
- (B) puts the economy on LRAS, which matches a point on the PPC, not inside it.
- (C) confuses idle resources with lost capacity. Neither the PPC nor LRAS moves when resources are unemployed.
- (D) describes output above Yf, where resources are being used more intensively than is sustainable.
Question 5 (constructed response · core)
Kestria’s labour force is 8.0 million and its natural rate of unemployment is 4.5%. The table shows three quarters.
| Quarter | Real GDP (VD billion) | Employed (million) |
|---|---|---|
| A | 380 | 7.56 |
| B | 400 | 7.64 |
| C | 410 | 7.68 |
(a) Calculate the unemployment rate in each quarter. (b) Identify Kestria’s full-employment output. Explain your choice. (c) For quarter A, calculate the cyclical unemployment in percentage points and in people. (d) State whether quarter C is to the left of, on, or to the right of the LRAS curve, and explain why the economy cannot stay there. (e) Some years later, after wages and prices have fully adjusted, Kestria’s price level is 15% higher. Resources and technology have not changed. Predict real GDP and the unemployment rate.
Worked solution and suggested Marlbridge rubric
(a) A: (8.0 − 7.56) ÷ 8.0 × 100 = 0.44 ÷ 8.0 × 100 = 5.5%. B: 0.36 ÷ 8.0 × 100 = 4.5%. C: 0.32 ÷ 8.0 × 100 = 4.0%.
(b) VD 400 billion (quarter B), because unemployment there equals the natural rate of 4.5%, so cyclical unemployment is zero.
(c) 5.5 − 4.5 = 1.0 percentage point; 0.01 × 8.0 million = 0.08 million (80,000) people.
(d) To the right of LRAS: output (VD 410 billion) is above Yf and unemployment (4.0%) is below the natural rate. Firms are using resources beyond their sustainable level (overtime, extra shifts), and workers will push for higher wages when contracts are renewed, so this cannot last.
(e) Real GDP = VD 400 billion and unemployment = 4.5%. In the long run a higher price level is matched by higher wages and input prices, so output returns to Yf and unemployment to the natural rate.
| Point | What earns it |
|---|---|
| 1 | All three unemployment rates correct |
| 1 | Yf = VD 400 billion, justified by unemployment equal to the natural rate |
| 1 | Cyclical unemployment of 1.0 point and 0.08 million people |
| 1 | Quarter C to the right of LRAS, with a reason it is not sustainable |
| 1 | VD 400 billion and 4.5%, linked to full adjustment of wages and prices |
Accept values carried forward from an error in (a).
Question 6 (constructed response · core)
(a) Draw a correctly labelled graph of Valdoria’s long-run aggregate supply curve. Label full-employment output Yf. Mark two points on the curve, L₁ at price level PL₁ and L₂ at a higher price level PL₂. (b) Explain why real output is the same at L₁ and L₂. (c) Use your graph to explain why there is no long-run trade-off between inflation and unemployment.
Model answer and suggested Marlbridge rubric
(a) Vertical axis: Price level. Horizontal axis: Real GDP (or real output). A vertical line labelled LRAS at Yf on the horizontal axis. L₂ directly above L₁, with PL₂ > PL₁ marked on the vertical axis.
(b) In the long run nominal wages and other input prices rise in proportion to the price level. Real wages and real profit per unit are unchanged, so firms have no reason to produce more. Output depends on resources and technology, which have not changed, so it stays at Yf.
(c) At both L₁ and L₂ the economy produces Yf, so unemployment equals the natural rate at both. Moving from PL₁ to PL₂ (inflation) does not lower unemployment in the long run. A higher price level or inflation rate buys no lasting fall in unemployment, so there is no long-run trade-off.
| Point | What earns it |
|---|---|
| 1 | Axes labelled price level and real GDP, with a vertical LRAS at Yf |
| 1 | L₂ directly above L₁ at a higher price level |
| 1 | Full adjustment of wages and input prices explains unchanged output |
| 1 | Same output means unemployment at the natural rate at both price levels, so no long-run trade-off |
A graph with a sloping LRAS earns no graph points. In (b), “prices are flexible” alone, with no link to costs or real profit, does not earn the point.
Question 7 (constructed response · stretch)
A Kestrian furniture maker sells a chair for VD 80. Each chair costs VD 48 in wages and VD 16 in materials. Then Kestria’s price level, and the chair’s price, rise by 25%.
(a) Calculate the profit per chair before the rise and in the short run, when wages and material prices have not changed. (b) Calculate the profit per chair in the long run, when wages and material prices have also risen 25%. Express it in the old prices. (c) Use (a) and (b) to explain why the SRAS curve slopes upward but the LRAS curve is vertical. (d) For each event, state whether it shifts only SRAS, or shifts LRAS as well. Give a reason.
- A temporary rise in the price of imported timber used by Kestrian firms.
- A lasting increase in the number of skilled workers after a national training programme.
Model answer and suggested Marlbridge rubric
(a) Before: 80 − (48 + 16) = 80 − 64 = VD 16. Short run: new price = 80 × 1.25 = VD 100; costs still VD 64; profit = VD 36.
(b) Wages = 48 × 1.25 = VD 60; materials = 16 × 1.25 = VD 20; cost = VD 80. Profit = 100 − 80 = VD 20. In the old prices: 20 ÷ 1.25 = VD 16, the same as before.
(c) In the short run, sticky costs mean a higher price level raises profit per unit (from VD 16 to VD 36), so firms produce more: SRAS slopes upward. In the long run, costs rise with the price level and real profit per unit returns to VD 16, so there is no reason to produce more: LRAS is vertical at Yf.
(d)
- Only SRAS (left). It raises production costs for a while, but it does not change the quantity or quality of Kestria’s resources or its technology.
- LRAS as well (right). More skilled workers raise the economy’s capacity, so full-employment output rises; the PPC shifts outward too.
| Point | What earns it |
|---|---|
| 1 | VD 16 before and VD 36 in the short run |
| 1 | VD 20 nominal and VD 16 real in the long run |
| 1 | Links the short-run profit rise to the upward SRAS |
| 1 | Links unchanged real profit to the vertical LRAS |
| 1 | Both events in (d) correctly classified with reasons |
Accept values carried forward from an error in (a). In (d), both items must be correct for the point.
How did you do?
- Q1, Q2 or Q7(a)–(c) wrong: re-read “The short run and the long run”, “Why the LRAS curve is vertical” and Worked example 1 in the study guide.
- Q3 or Q5 wrong: revisit “What full employment means” (under “Why the LRAS curve is vertical”) and Worked example 2.
- Q4 or Q7(d) wrong: revisit “The LRAS curve and the PPC”.
- Q6 wrong: revisit Figure 1 and “No long-run trade-off between inflation and unemployment”.
Then tick off the topic checklist.