These are original Marlbridge practice questions, not past exam questions. The questions use Kestria, Lumeria and Tarnland, 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. Kestria’s data continue the Topic 3.4 practice set: labour force 8.0 million, natural rate of unemployment 4.5%, full-employment output Yf = VD 400 billion, and each VD 10 billion of real output needs 0.04 million workers. A four-function calculator is enough; round percentages to 2 decimal places.
Question 1 (multiple choice · foundation)
In the AD–AS model, short-run equilibrium occurs where
- (A) the AD curve crosses the LRAS curve
- (B) the AD curve crosses the SRAS curve
- (C) the SRAS curve crosses the LRAS curve
- (D) the unemployment rate is zero
Answer and explanation
Answer: (B). Short-run equilibrium is where the aggregate quantity of output demanded equals the aggregate quantity supplied, which is where AD crosses SRAS.
- (A) ignores SRAS. In the short run, output is set by AD and SRAS together; LRAS only shows whether the point is also a long-run equilibrium.
- (C) leaves out demand. SRAS and LRAS crossing tells you nothing about what buyers want.
- (D) confuses equilibrium with zero unemployment. Even long-run equilibrium has unemployment at the natural rate, not zero.
Question 2 (multiple choice · core)
At a price level of 120 in Kestria, firms supply VD 410 billion of real output, but buyers plan to purchase only VD 370 billion. What happens next?
- (A) Inventories rise more than firms planned, so firms cut prices and output, and the price level falls towards equilibrium.
- (B) Inventories fall unexpectedly, so firms raise prices, and the price level rises towards equilibrium.
- (C) The AD curve shifts right until buyers purchase VD 410 billion.
- (D) Nothing happens, because the price level is above Yf.
Answer and explanation
Answer: (A). There is a surplus of 410 − 370 = VD 40 billion. Unsold goods pile up, so firms lower prices and produce less, moving along both curves towards equilibrium.
- (B) describes a shortage, which happens when the price level is below equilibrium.
- (C) confuses a movement along the curves with a shift. A surplus is removed by a change in the price level, not by a change in AD.
- (D) mixes up the axes: Yf is a level of real output, not a price level, and the surplus itself creates pressure for change.
Question 3 (multiple choice · core)
A country’s unemployment rate is below its natural rate of unemployment. Where is its short-run equilibrium in the AD–AS model?
- (A) To the left of the LRAS curve, with a negative output gap
- (B) To the right of the LRAS curve, with a positive output gap
- (C) On the LRAS curve, with no output gap
- (D) Where the SRAS curve crosses the LRAS curve
Answer and explanation
Answer: (B). Unemployment below the natural rate means output is above Yf, to the right of LRAS: a positive (inflationary) gap.
- (A) is the opposite case: output below Yf goes with unemployment above the natural rate.
- (C) would need unemployment equal to the natural rate.
- (D) is not an equilibrium condition; short-run equilibrium is where AD crosses SRAS.
Question 4 (multiple choice · core)
In an earlier year, Kestria’s AD and SRAS curves crossed at a price level of 106 and real GDP of VD 390 billion. Its LRAS curve was at VD 400 billion. Which statement is correct about that year?
- (A) There was a negative output gap of VD 10 billion, and unemployment was above 4.5%.
- (B) There was a positive output gap of VD 10 billion, and unemployment was below 4.5%.
- (C) There was a negative output gap of VD 10 billion, but unemployment equalled 4.5% because the economy was in equilibrium.
- (D) Kestria was in long-run equilibrium, because AD equalled SRAS.
Answer and explanation
Answer: (A). Gap = 390 − 400 = −VD 10 billion. Output below Yf means fewer jobs than at full employment, so unemployment is above the natural rate (here 5.0%).
- (B) gets the sign of the gap backwards: actual minus potential is negative.
- (C) assumes equilibrium means full employment. In this short-run equilibrium, cyclical unemployment is positive.
- (D) confuses short-run and long-run equilibrium. Long-run equilibrium also needs output at Yf.
Question 5 (calculation · core)
The table shows Kestria’s AD and SRAS schedules this year.
| Price level (index) | 100 | 105 | 110 | 115 | 120 |
|---|---|---|---|---|---|
| AD: real GDP demanded (VD billion) | 410 | 400 | 390 | 380 | 370 |
| SRAS: real GDP supplied (VD billion) | 370 | 380 | 390 | 400 | 410 |
(a) Identify the short-run equilibrium price level and real output. (b) At a price level of 100, calculate the surplus or shortage and explain how the economy moves towards equilibrium. (c) Calculate the output gap in VD billion and as a percentage of Yf. Name the type of gap. (d) Calculate the unemployment rate and the number of people cyclically unemployed.
Worked solution and suggested Marlbridge rubric
(a) AD = SRAS = VD 390 billion at a price level of 110. PL₁ = 110, Y₁ = VD 390 billion.
(b) Demanded VD 410 billion, supplied VD 370 billion: a shortage of VD 40 billion. Inventories fall unexpectedly, so firms raise prices and increase output. The price level rises towards 110.
(c) Gap = 390 − 400 = −VD 10 billion; −10 ÷ 400 × 100 = −2.50%. This is a negative (recessionary) gap.
(d) VD 10 billion less output means 0.04 million fewer jobs than at Yf. At Yf, unemployment is 4.5% of 8.0 million = 0.36 million, so employment is 7.64 million. Now employment = 7.64 − 0.04 = 7.60 million and unemployment = 8.0 − 7.60 = 0.40 million. Rate = 0.40 ÷ 8.0 × 100 = 5.00%. Cyclical unemployment = 5.00 − 4.50 = 0.50 points, or 0.04 million people.
| Point | What earns it |
|---|---|
| 1 | PL 110 and VD 390 billion |
| 1 | Shortage of VD 40 billion with falling inventories leading to a higher price level |
| 1 | Gap of −VD 10 billion (−2.50%), named negative or recessionary |
| 1 | Unemployment rate of 5.00% |
| 1 | Cyclical unemployment of 0.50 points and 0.04 million people |
Accept values carried forward from an error in (a).
Question 6 (constructed response · core)
Kestria is in short-run equilibrium with an unemployment rate of 3.5%. Its natural rate of unemployment is 4.5%.
(a) Draw a correctly labelled AD–AS graph showing Kestria’s current short-run equilibrium. Label the equilibrium price level PL₁, real output Y₁ and full-employment output Yf. (b) Identify the type of output gap shown on your graph. (c) Explain why Kestria cannot remain at this level of output indefinitely.
Model answer and suggested Marlbridge rubric
(a) Vertical axis: Price level. Horizontal axis: Real GDP. A downward-sloping AD, an upward-sloping SRAS and a vertical LRAS at Yf. AD and SRAS cross to the right of LRAS; dotted lines from the crossing point give PL₁ on the vertical axis and Y₁ on the horizontal axis, with Y₁ > Yf.
(b) A positive (inflationary) output gap: unemployment (3.5%) is below the natural rate (4.5%), so output is above full-employment output.
(c) Firms are producing more than is sustainable, using overtime and extra shifts, and workers are scarce. When wage contracts are renewed, workers can win higher nominal wages, which raises costs. Output above Yf therefore cannot last; Topic 3.7 shows how the economy adjusts.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes with downward-sloping AD and upward-sloping SRAS |
| 1 | Vertical LRAS at Yf |
| 1 | AD and SRAS crossing to the right of LRAS, with PL₁ and Y₁ shown |
| 1 | Positive (inflationary) gap identified from unemployment below the natural rate |
| 1 | Explains that output above Yf is unsustainable because resources are over-used and wages come under upward pressure |
A graph with the crossing point on or to the left of LRAS does not earn the third point. “Price” and “quantity” as axis labels do not earn the first point.
Question 7 (constructed response · stretch)
| Country | Short-run equilibrium real GDP (VD billion) | Unemployment rate | Natural rate | Yf (VD billion) |
|---|---|---|---|---|
| Lumeria | 630 | 3.0% | 4.0% | not given |
| Tarnland | 288 | not given | 6.0% | 300 |
In Lumeria, each 1 percentage point of unemployment corresponds to VD 15 billion of real output.
(a) Calculate Lumeria’s full-employment output and its output gap, in VD billion and as a percentage of Yf. Name the gap. (b) Calculate Tarnland’s output gap in VD billion and as a percentage of Yf. State whether Tarnland’s unemployment rate is above, equal to or below 6.0%, and explain. (c) A student says: “Tarnland’s AD equals its SRAS, so Tarnland must be in long-run equilibrium.” Evaluate this claim.
Model answer and suggested Marlbridge rubric
(a) Lumeria’s unemployment is 4.0 − 3.0 = 1.0 point below the natural rate, so output is 1.0 × 15 = VD 15 billion above Yf. Yf = 630 − 15 = VD 615 billion. Gap = 630 − 615 = +VD 15 billion; 15 ÷ 615 × 100 = +2.44%. This is a positive (inflationary) gap.
(b) Gap = 288 − 300 = −VD 12 billion; −12 ÷ 300 × 100 = −4.00%. Unemployment is above 6.0%: output is below Yf, so fewer workers are needed than at full employment and cyclical unemployment is positive.
(c) The claim is wrong. AD = SRAS means Tarnland is in short-run equilibrium: there is no surplus or shortage of output at the current price level. Long-run equilibrium also needs AD and SRAS to cross on LRAS, at Yf. Tarnland’s equilibrium output (VD 288 billion) is below Yf (VD 300 billion), so it is not in long-run equilibrium.
| Point | What earns it |
|---|---|
| 1 | Lumeria’s Yf = VD 615 billion, from unemployment 1.0 point below the natural rate |
| 1 | Lumeria’s gap of +VD 15 billion (+2.44%), named positive or inflationary |
| 1 | Tarnland’s gap of −VD 12 billion (−4.00%) |
| 1 | Tarnland’s unemployment above 6.0%, linked to output below Yf |
| 1 | Rejects the claim: AD = SRAS gives short-run equilibrium only; long-run needs output at Yf |
In (a), using 630 instead of 615 as the denominator (2.38%) loses only the second point. Accept values carried forward from an error in Yf.
How did you do?
- Q1, Q2 or Q5(a)–(b) wrong: re-read “Short-run equilibrium” and Worked example 1 in the study guide.
- Q4 or Q7(c) wrong: revisit “Long-run equilibrium”.
- Q3, Q5(c)–(d) or Q7(a)–(b) wrong: revisit “Output gaps” and Worked example 2.
- Q6 wrong: revisit Figure 2 and “How to draw an AD–AS equilibrium graph”.
Then tick off the topic checklist.