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 government takes no policy action; “the long run” means long enough for all wages and prices to adjust fully; LRAS does not move unless a question says so; a four-function calculator is enough.
Question 1 (multiple choice · foundation)
Valdoria is in a recessionary gap, and the government takes no action. Which sequence describes how the economy returns to full-employment output in the long run?
- (A) Nominal wages fall, the SRAS curve shifts right, the price level falls and real GDP rises.
- (B) Nominal wages rise, the SRAS curve shifts left, the price level rises and real GDP rises.
- (C) The lower price level shifts the AD curve right until real GDP reaches full-employment output.
- (D) The LRAS curve shifts left until it reaches the current level of real GDP.
Answer and explanation
Answer: (A). Unemployment is above the natural rate, so nominal wages fall when contracts are renewed. Lower costs shift SRAS right, which lowers the price level and raises real GDP back to Yf.
- (B) has the wage change the wrong way round. Rising wages shift SRAS left, which would lower real GDP further.
- (C) confuses a movement along AD with a shift of AD. A change in the price level never shifts AD.
- (D) treats LRAS as if it moves to meet the economy. LRAS shifts only when resources or technology change.
Question 2 (multiple choice · core)
Kestria starts in long-run equilibrium. Household confidence rises sharply and AD increases. Compared with the starting point, what is true once the economy has fully adjusted in the long run?
- (A) The price level is higher; real GDP and the unemployment rate are the same.
- (B) The price level is higher; real GDP is higher and the unemployment rate is lower.
- (C) The price level is the same; real GDP is higher and the unemployment rate is lower.
- (D) The price level is lower; real GDP and the unemployment rate are the same.
Answer and explanation
Answer: (A). In the short run, output rises above Yf. Then nominal wages rise, SRAS shifts left, and output returns to Yf with unemployment at the natural rate. The price level rises in both stages, so it ends higher.
- (B) describes the short-run effect of the AD increase, not the long run.
- (C) describes a lasting gain in output and jobs with no rise in prices. Once wages adjust, output returns to Yf and unemployment to the natural rate, and the price level ends higher. A rise in confidence changes spending, not capacity, so it cannot raise Yf.
- (D) has the price level moving the wrong way. A lower long-run price level follows a fall in AD.
Question 3 (multiple choice · core)
A one-year drought cuts Valdoria’s harvest and raises food costs for firms, so SRAS shifts left. The next year the rains return. If the government takes no action, where does Valdoria end up in the long run, compared with before the drought?
- (A) A higher price level and lower real GDP.
- (B) A higher price level and real GDP equal to full-employment output.
- (C) The same price level and the same real GDP as before the drought.
- (D) A lower price level and real GDP above full-employment output.
Answer and explanation
Answer: (C). The drought is a temporary negative supply shock. Unemployment above the natural rate puts downward pressure on wages, and the return of normal harvests lowers food costs, so SRAS shifts back to the right. AD and LRAS have not moved, so the long-run equilibrium is again where AD crosses LRAS: the original price level and Yf.
- (A) is the short-run result of the drought (stagflation).
- (B) is the long-run result of an AD increase, not of a temporary SRAS decrease.
- (D) would need SRAS to end up to the right of where it started. Nothing has pushed costs below their original level, and output above Yf cannot be sustained.
Question 4 (multiple choice · core)
Which event would shift Valdoria’s long-run aggregate supply curve to the right?
- (A) Nominal wages fall after a long recession.
- (B) Years of business investment increase the economy’s stock of machinery and equipment.
- (C) Exports rise because of strong growth in neighbouring countries.
- (D) World oil prices fall for six months.
Answer and explanation
Answer: (B). More capital raises the economy’s capacity, so full-employment output rises: LRAS shifts right. This is economic growth.
- (A) is self-adjustment. Lower wages shift SRAS right; they do not change resources or technology.
- (C) raises net exports, so it shifts AD right.
- (D) is a temporary fall in input costs. It shifts SRAS right for a while, but capacity is unchanged.
Question 5 (calculation · core)
Kestria was in long-run equilibrium at a price level of 120 and full-employment output of VD 600 billion. Then consumer confidence fell, and AD shifted left to AD₂. The table shows AD₂ and the original short-run aggregate supply curve, SRAS₁ (VD billion).
| Price level | 116 | 117 | 118 | 119 | 120 | 121 |
|---|---|---|---|---|---|---|
| AD₂ | 630 | 615 | 600 | 585 | 570 | 555 |
| SRAS₁ | 540 | 555 | 570 | 585 | 600 | 615 |
(a) Find the short-run equilibrium price level and real GDP. Identify the type and size of the output gap. (b) Explain what happens in the labour market and to SRAS in the long run, with no government action. (c) Find the long-run equilibrium price level. (d) By how much must SRAS shift, and in which direction, at every price level?
Worked solution and suggested Marlbridge rubric
(a) AD₂ = SRAS₁ at a price level of 119 and real GDP of VD 585 billion. This is a recessionary gap of 600 − 585 = VD 15 billion (2.5% of Yf).
(b) Output below Yf means unemployment is above the natural rate. With many people looking for work, nominal wages fall as contracts are renewed. Lower costs shift SRAS right.
(c) In the long run real GDP returns to Yf = 600 on AD₂. From the table, AD₂ = 600 at a price level of 118.
(d) The new SRAS must supply 600 at a price level of 118. SRAS₁ supplies only 570 at 118, so SRAS shifts right by VD 30 billion at every price level (at 120 it now supplies 630).
| Point | What earns it |
|---|---|
| 1 | Price level 119 and real GDP VD 585 billion |
| 1 | Recessionary gap of VD 15 billion |
| 1 | Unemployment above the natural rate leads to lower nominal wages, shifting SRAS right |
| 1 | Long-run price level 118, found where AD₂ = Yf |
| 1 | SRAS shifts right by VD 30 billion |
Accept values carried forward from an error in (a). A common error in (d) is to give VD 15 billion (the gap): the shift is larger because the price level falls as SRAS moves. An answer of “SRAS shifts left” in (b) or (d) earns no point for that part.
Question 6 (constructed response · core)
Valdoria is in long-run equilibrium. Then a sudden, temporary rise in the world price of imported fuel raises production costs for Valdorian firms.
(a) Draw a correctly labelled AD–AS graph showing LRAS, AD and the original SRAS. Label the original equilibrium E₁ with price level PL₁ and output Yf. (b) On your graph, show the short-run effect of the fuel price rise. Label the new equilibrium E₂, the price level PL₂ and output Y₂. (c) State what happens to the unemployment rate in the short run, compared with the natural rate. (d) Assume the government takes no action and fuel prices return to normal. Explain how the economy adjusts in the long run, and state the long-run price level and real GDP compared with E₁.
Model answer and suggested Marlbridge rubric
(a) Vertical axis: Price level. Horizontal axis: Real GDP. A vertical LRAS at Yf, a downward-sloping AD and an upward-sloping SRAS₁ crossing at E₁ on LRAS, at PL₁.
(b) SRAS shifts left to SRAS₂. E₂ is where SRAS₂ crosses AD: PL₂ is above PL₁ and Y₂ is below Yf.
(c) Output has fallen below Yf, so unemployment rises above the natural rate.
(d) With unemployment above the natural rate, nominal wages fall, and fuel costs return to normal. Lower costs shift SRAS back right, to SRAS₁. The economy returns to E₁: the price level returns to PL₁ and real GDP to Yf, with unemployment at the natural rate.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes, vertical LRAS at Yf, and E₁ where AD and SRAS cross on LRAS |
| 1 | SRAS shifted left, with PL₂ above PL₁ and Y₂ below Yf |
| 1 | Unemployment rises above the natural rate |
| 1 | Falling wages (or input costs) shift SRAS right |
| 1 | Long run: price level back at PL₁ and real GDP back at Yf |
A graph that shifts AD instead of SRAS earns no point for (b). In (d), an answer that ends at a higher price level than PL₁ does not earn the last point.
Question 7 (constructed response · stretch)
In a different decade, Kestria was in long-run equilibrium at a price level of 100. A typical factory worker earned a nominal wage of VD 30 an hour. A boom in foreign demand raised AD, and the government took no action. In the short run the price level rose to 105 while the nominal wage stayed at VD 30. In the long run the price level settled at 110.
(a) Calculate the worker’s real wage, in base-year valdas, at the start and in the short run. Explain why firms were willing to hire more workers in the short run. (b) Calculate the nominal wage needed in the long run to restore the original real wage, and the percentage rise this represents. (c) Explain why nominal wages rise in this situation, and what this does to SRAS and real GDP. (d) Over the following years, more skilled workers and better technology raise Kestria’s full-employment output from VD 600 billion to VD 648 billion. Calculate the growth rate of full-employment output and state which curve shifts. (e) Explain why the AD increase in this question did not create lasting economic growth, while the change in (d) did.
Model answer and suggested Marlbridge rubric
(a) Start: 30 ÷ 1.00 = VD 30.00. Short run: 30 ÷ 1.05 = VD 28.57. Firms sell at prices 5% higher, but each hour of labour costs them less in real terms, so producing and hiring more is profitable.
(b) Nominal wage needed = 30 × 1.10 = VD 33, a rise of (33 − 30) ÷ 30 × 100 = 10%. Check: 33 ÷ 1.10 = VD 30.00.
(c) Output is above Yf, so unemployment is below the natural rate. Firms compete for scarce workers, and workers want to recover their lost purchasing power, so nominal wages rise when contracts are renewed. Higher wages raise costs and shift SRAS left, raising the price level and pulling real GDP back down to Yf.
(d) Growth = (648 − 600) ÷ 600 × 100 = 8%. The LRAS curve shifts right, from 600 to 648.
(e) The AD increase raised output only while wages lagged behind prices. Once wages adjusted, output returned to the same Yf, and only the price level was higher. In (d), the economy’s capacity grew, so the full-employment output it returns to is higher: that is economic growth.
| Point | What earns it |
|---|---|
| 1 | Real wages VD 30.00 and VD 28.57, with a link to lower real labour cost and more hiring |
| 1 | VD 33 and 10% |
| 1 | Unemployment below the natural rate leads to higher nominal wages, shifting SRAS left and returning output to Yf |
| 1 | 8% growth and a rightward shift of LRAS |
| 1 | Contrasts a temporary output gain from AD with a lasting rise in capacity (Yf) |
Accept values carried forward from an error in (a) or (b). In (d), “AD shifts right” or “SRAS shifts right” alone does not earn the point.
How did you do?
- Q1 or Q5 wrong: re-read “Closing a recessionary gap” and Worked example 1 in the study guide, including its Check.
- Q2 or Q7(a)–(c) wrong: revisit “Closing an inflationary gap” and Worked example 2.
- Q3 or Q6 wrong: revisit “Supply shocks and self-adjustment” and Figure 2.
- Q4 or Q7(d)–(e) wrong: revisit “Shifts of the LRAS curve”.
Then tick off the topic checklist.