These are original Marlbridge practice questions, not past exam questions. The questions use Kestria and Lumeria, 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 and 3.5 practice sets: 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. All questions are about the short run: LRAS does not shift. A four-function calculator is enough; round percentages to 2 decimal places.
Question 1 (multiple choice · foundation)
An economy starts in long-run equilibrium. Consumer confidence collapses. In the short run, what happens to the price level, real output and unemployment?
- (A) The price level falls, real output falls and unemployment rises.
- (B) The price level rises, real output falls and unemployment rises.
- (C) The price level falls, real output rises and unemployment falls.
- (D) The price level falls, but real output and unemployment do not change.
Answer and explanation
Answer: (A). Lower confidence cuts consumption, so AD shifts left. Moving down SRAS, the price level and output both fall, firms need fewer workers and unemployment rises.
- (B) is the result of a negative supply shock (stagflation), not a fall in AD.
- (C) describes a positive supply shock: the price level falls but output rises.
- (D) treats SRAS as vertical. In the short run, sticky wages mean output changes when AD shifts.
Question 2 (multiple choice · core)
Which event is most likely to cause cost-push inflation in Kestria?
- (A) A sharp rise in the world price of fuel used by most Kestrian firms
- (B) A rise in household confidence that increases consumer spending
- (C) An increase in government spending on new roads
- (D) Higher incomes abroad that increase demand for Kestrian exports
Answer and explanation
Answer: (A). Higher fuel prices raise production costs, so SRAS shifts left and the price level rises: cost-push inflation.
- (B), (C) and (D) all increase spending, so they shift AD right. Any inflation they cause is demand-pull.
Question 3 (multiple choice · core)
Over one year, Kestria’s price level rises while its real GDP falls. Which shift best explains this?
- (A) A decrease in short-run aggregate supply
- (B) An increase in aggregate demand
- (C) A decrease in aggregate demand
- (D) An increase in short-run aggregate supply
Answer and explanation
Answer: (A). The price level and output moved in opposite directions, which points to an SRAS shock. A higher price level with lower output means SRAS decreased.
- (B) would raise both the price level and output.
- (C) would lower both.
- (D) would lower the price level and raise output, the opposite of what happened.
Question 4 (multiple choice · core)
An unusually good harvest lowers the cost of food and raw materials across Kestria. In the short run, the most likely result is
- (A) a lower price level, higher real output and lower unemployment
- (B) a higher price level, higher real output and lower unemployment
- (C) a lower price level, lower real output and higher unemployment
- (D) a higher price level, lower real output and higher unemployment
Answer and explanation
Answer: (A). Lower input costs are a positive supply shock: SRAS shifts right. The price level falls, output rises and firms hire more workers.
- (B) is the effect of an increase in AD: the price level would rise, not fall.
- (C) is the effect of a decrease in AD.
- (D) is the effect of a negative supply shock.
Question 5 (calculation · core)
Kestria starts in long-run equilibrium. Then foreign incomes rise, and spending on Kestrian exports increases by VD 5 billion at every price level. Kestria’s MPC is 0.75.
| Price level (index) | 105 | 110 | 115 | 120 | 125 |
|---|---|---|---|---|---|
| AD₁ (VD billion) | 420 | 410 | 400 | 390 | 380 |
| SRAS₁ (VD billion) | 380 | 390 | 400 | 410 | 420 |
(a) Calculate how far AD shifts and write the new AD schedule. (b) Find the new short-run equilibrium price level and real output. (c) Calculate the inflation rate, the change in real output and the new unemployment rate. (d) Explain why real output rises by less than the shift in AD. (e) Name the type of inflation and the type of output gap.
Worked solution and suggested Marlbridge rubric
(a) Multiplier = 1 ÷ (1 − 0.75) = 4. AD shifts right by 4 × 5 = VD 20 billion. AD₂: 440, 430, 420, 410, 400 at price levels 105 to 125.
(b) AD₂ = SRAS₁ = VD 410 billion at a price level of 120.
(c) Inflation = (120 − 115) ÷ 115 × 100 = 4.35%. Real output rises by 410 − 400 = VD 10 billion (2.50%). Employment rises by 0.04 million, from 7.64 to 7.68 million, so unemployment = 0.32 ÷ 8.0 × 100 = 4.00%, down from 4.5%.
(d) At the old price level (115) there is a shortage of 420 − 400 = VD 20 billion, so the price level rises. The higher price level reduces the quantity of real output demanded along AD₂ (wealth, interest-rate and exchange-rate effects), from VD 420 billion to VD 410 billion. Part of the extra spending is absorbed by higher prices rather than more output.
(e) Demand-pull inflation; a positive (inflationary) output gap of VD 10 billion.
| Point | What earns it |
|---|---|
| 1 | Shift of VD 20 billion using the multiplier of 4 |
| 1 | New equilibrium at PL 120 and VD 410 billion |
| 1 | Inflation of 4.35% and unemployment of 4.00% |
| 1 | Explains that the rise in the price level reduces quantity demanded along the new AD |
| 1 | Demand-pull and a positive gap, both named |
Accept values carried forward from an error in (a).
Question 6 (constructed response · core)
Kestria is in long-run equilibrium. Then the price of imported energy, used by almost all Kestrian firms, rises sharply.
(a) Draw a correctly labelled AD–AS graph showing Kestria’s initial long-run equilibrium. Label the price level PL₁ and full-employment output Yf. (b) On the same graph, show the short-run effect of the energy price rise. Label the new price level PL₂ and the new real output Y₂. (c) Explain what happens to unemployment in the short run. (d) Identify the type of inflation, and the term for this combination of changes.
Model answer and suggested Marlbridge rubric
(a) Vertical axis: Price level. Horizontal axis: Real GDP. Downward-sloping AD, upward-sloping SRAS₁ and vertical LRAS at Yf, all crossing at one point with PL₁ shown.
(b) SRAS₂ to the left of SRAS₁. The new equilibrium, where AD crosses SRAS₂, is at a higher price level PL₂ and a lower real output Y₂, to the left of LRAS. LRAS and AD do not move.
(c) Unemployment rises. Firms produce less real output, so they need fewer workers, and unemployment goes above the natural rate.
(d) Cost-push inflation. A higher price level together with lower output and higher unemployment is stagflation.
| Point | What earns it |
|---|---|
| 1 | Labelled axes with AD, SRAS₁ and LRAS crossing at one point at Yf |
| 1 | SRAS shifted left, with AD and LRAS unchanged |
| 1 | PL₂ above PL₁ and Y₂ below Yf, read from the new crossing point |
| 1 | Unemployment rises because output and the need for workers fall |
| 1 | Cost-push inflation and stagflation both named |
Shifting AD instead of SRAS earns no graph point for (b). Shifting LRAS as well as SRAS loses the second point.
Question 7 (constructed response · stretch)
Part 1. The table shows three separate episodes in Lumeria.
| Episode | Price level | Real GDP (VD billion) | Unemployment rate |
|---|---|---|---|
| 1 | 100 → 103 | 600 → 612 | 5.0% → 4.4% |
| 2 | 103 → 106 | 612 → 600 | 4.4% → 5.0% |
| 3 | 106 → 104 | 600 → 606 | 5.0% → 4.7% |
(a) For each episode, identify the shift (which curve, which direction) and suggest one possible cause.
Part 2. Kestria starts in long-run equilibrium (price level 115, real GDP VD 400 billion) with the schedules from Question 5. In the same year, AD increases by VD 20 billion and SRAS decreases by VD 20 billion at every price level.
(b) Find the new short-run equilibrium. (c) Instead, suppose AD increases by VD 20 billion and SRAS decreases by VD 40 billion. Find the new equilibrium and the unemployment rate. (d) Use (b) and (c) to explain why, when AD increases and SRAS decreases together, the direction of the price-level change is certain but the direction of the output change is not.
Model answer and suggested Marlbridge rubric
(a) Episode 1: price level and output both rose → AD increased (for example, higher government spending or business optimism). Episode 2: price level rose, output fell → SRAS decreased (for example, higher energy prices or a general wage rise). Episode 3: price level fell, output rose → SRAS increased (for example, cheaper raw materials or higher productivity).
(b) AD₂ = 420 − 2(PL − 115) and SRAS₂ = 380 + 2(PL − 115). Setting them equal: 40 = 4(PL − 115), so PL − 115 = 10. New equilibrium: PL 125, real GDP VD 400 billion. Output is unchanged.
(c) SRAS₃ = 360 + 2(PL − 115). Setting 420 − 2(PL − 115) = 360 + 2(PL − 115): 60 = 4(PL − 115), PL − 115 = 15. New equilibrium: PL 130, real GDP VD 390 billion. Output is VD 10 billion below Yf, so employment is 7.60 million and unemployment = 0.40 ÷ 8.0 × 100 = 5.00%.
(d) Both shifts push the price level up: higher AD creates a shortage, and lower SRAS raises costs. So the price level must rise. But the shifts push output in opposite directions: higher AD raises output, lower SRAS reduces it. Which effect wins depends on the sizes of the shifts. In (b) they cancel; in (c) the SRAS shift is bigger, so output falls. Without the sizes, the change in output is indeterminate.
| Point | What earns it |
|---|---|
| 1 | All three episodes correctly identified, each with a plausible cause |
| 1 | PL 125 and VD 400 billion in (b) |
| 1 | PL 130, VD 390 billion and 5.00% in (c) |
| 1 | Explains that both shifts raise the price level |
| 1 | Explains that the output effects work in opposite directions, so the result depends on the sizes of the shifts |
In (a), all three must be correct for the point. Accept equilibria found by writing out the new schedules instead of the equations.
How did you do?
- Q1, Q5 or Q7(a) Episode 1 wrong: re-read “Demand shocks: shifts of AD” and Worked example 1 in the study guide.
- Q2, Q4 or Q6 wrong: re-read “Supply shocks: shifts of SRAS” and Worked example 2.
- Q3 or Q7(a) wrong: revisit “All four shocks from the same starting point” and the same-direction / opposite-direction rule.
- Q7(b)–(d) wrong: practise writing out new schedules after each shift, then compare the two effects on output.
Then tick off the topic checklist.