These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, the fictional country used across the Marlbridge macroeconomics pages; its currency is the valda (VD) and its central bank is the Central Bank of Valdoria (CBV). 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: money earns no interest, bonds do; the money supply is set by the CBV; money amounts are in VD bn.
Question 1 (multiple choice · foundation)
Why does the money demand curve slope downwards?
- (A) A higher price level means people need more money for their purchases.
- (B) A higher nominal interest rate raises the opportunity cost of holding money, so people hold less of it.
- (C) The central bank reduces the money supply when the interest rate rises.
- (D) A higher real interest rate encourages households to save more of their income.
Answer and explanation
Answer: (B). Money earns little or no interest. When the nominal interest rate rises, each valda held as money gives up more interest, so the quantity of money demanded falls. That inverse relationship is the downward slope.
- (A) describes a shift of money demand caused by the price level, not the slope of the curve.
- (C) describes the money supply, which in this model does not respond to the interest rate at all.
- (D) is about saving and the real interest rate, which belong to the loanable funds market, not to the choice between money and bonds.
Question 2 (multiple choice · core)
Valdoria’s money market is at a nominal interest rate above the equilibrium rate. Which sequence describes what happens next?
- (A) There is a shortage of money; people sell bonds; bond prices fall; the interest rate rises.
- (B) There is a surplus of money; people sell bonds; bond prices rise; the interest rate rises.
- (C) There is a surplus of money; people buy bonds; bond prices rise; the interest rate falls.
- (D) There is a surplus of money; the CBV reduces the money supply until the interest rate falls.
Answer and explanation
Answer: (C). Above equilibrium, the quantity of money supplied is greater than the quantity demanded. People hold more money than they want and use it to buy bonds. Higher demand raises bond prices, and higher bond prices mean lower interest rates.
- (A) describes a rate below equilibrium.
- (B) gets the bond trade wrong: people with surplus money buy bonds, and rising bond prices lower interest rates, not raise them.
- (D) brings in the central bank. Market forces move the rate back to equilibrium without any policy action.
Question 3 (multiple choice · core)
The price level in Valdoria falls, and the money supply does not change. What happens in the money market?
- (A) Money demand shifts left and the nominal interest rate falls.
- (B) Money demand shifts right and the nominal interest rate rises.
- (C) Money supply shifts right and the nominal interest rate falls.
- (D) There is a movement along money demand and the nominal interest rate does not change.
Answer and explanation
Answer: (A). With lower prices, people need fewer valdas for the same purchases, so they want to hold less money at every interest rate. MD shifts left along the vertical MS curve, and the equilibrium rate falls.
- (B) gets the direction of the shift wrong; a higher price level shifts MD right.
- (C) puts the change on the wrong curve. The price level affects money demand; MS changes only when the quantity of money changes.
- (D) is wrong because the price level is not on either axis, so a change in it shifts a curve.
Question 4 (multiple choice · core)
Which of the following shifts Valdoria’s money supply curve to the right?
- (A) A rise in the nominal interest rate
- (B) A rise in real GDP
- (C) The CBV buys government bonds from commercial banks
- (D) A fall in the price level
Answer and explanation
Answer: (C). When the CBV buys bonds, it pays with new reserves. The monetary base rises and the banking system can create more money, so MS shifts right.
- (A) The money supply curve is vertical; a change in the interest rate does not change the quantity of money.
- (B) Higher real GDP means more transactions, which shifts money demand right.
- (D) A lower price level shifts money demand left.
Question 5 (calculation · core)
The table shows money demand in Valdoria. The money supply is VD 450 bn.
| Nominal interest rate | Quantity of money demanded |
|---|---|
| 9% | VD 330 bn |
| 7% | VD 390 bn |
| 5% | VD 450 bn |
| 3% | VD 510 bn |
| 1% | VD 570 bn |
(a) What is the equilibrium nominal interest rate? (b) At 3%, is there a surplus or a shortage of money, and how large is it? (c) Starting at 3%, explain how bond trading moves the rate to equilibrium. (d) The CBV reduces the money supply to VD 390 bn. What is the new equilibrium rate?
Worked solution
(a) Quantity demanded equals VD 450 bn at 5%.
(b) At 3%, quantity demanded = VD 510 bn and quantity supplied = VD 450 bn: a shortage of VD 60 bn.
(c) People want to hold more money than exists, so they sell bonds to get money. The supply of bonds offered for sale rises, bond prices fall, and lower bond prices mean higher interest rates. The rate rises until it reaches 5%.
(d) Quantity demanded equals VD 390 bn at 7%. A smaller money supply raises the equilibrium nominal interest rate.
Suggested mark points (4): 1 for 5%; 1 for a shortage of VD 60 bn; 1 for selling bonds → bond prices fall → rate rises; 1 for 7%.
Question 6 (constructed response · core)
Valdoria’s money market is in equilibrium. Then real GDP rises sharply during a boom. The CBV takes no action.
(a) Draw a correctly labelled graph of the money market. Show the original equilibrium nominal interest rate, labelled i₁. (b) On your graph, show the effect of the rise in real GDP. Label the new equilibrium nominal interest rate i₂. (c) Explain why the rise in real GDP has the effect you showed. (d) What happens to the price of existing bonds? Explain. (e) Explain why the money supply curve does not move.
Worked solution and suggested Marlbridge rubric
(a) Vertical axis: Nominal interest rate. Horizontal axis: Quantity of money. A vertical MS curve and a downward-sloping MD₁ curve, crossing at i₁.
(b) MD shifts right from MD₁ to MD₂. The new intersection with the unchanged MS curve is at a higher rate, i₂ > i₁. The quantity of money is unchanged.
(c) With higher real GDP, more goods and services are bought and sold. People need more money for these transactions, so they want to hold more money at every interest rate.
(d) Bond prices fall. At i₁ there is now a shortage of money, so people sell bonds to get money. Bond prices fall, which is the same thing as interest rates rising. (Accept: interest rates and bond prices move in opposite directions, so a higher interest rate means lower prices for existing bonds.)
(e) The quantity of money depends on the monetary base set by the CBV and on the banking system, not on the level of real GDP or the interest rate. With no CBV action, the quantity of money is unchanged.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled graph: nominal interest rate and quantity of money on the axes, vertical MS, downward-sloping MD, i₁ shown |
| 1 | MD shifted right with a higher i₂ shown on the vertical axis |
| 1 | Explains that more transactions need more money |
| 1 | Bond prices fall, with a valid reason |
| 1 | Explains that MS is set by the central bank and does not respond to real GDP |
A graph with “Interest rate” alone on the axis can earn the first point only if the rate is clearly the nominal one elsewhere in the answer; “Real interest rate” does not earn it.
Question 7 (constructed response · stretch)
Valdoria’s money demand is given by Qd = 900 − 40i, where Qd is in VD bn and i is the nominal interest rate in per cent. The money supply is VD 700 bn.
(a) Calculate the equilibrium nominal interest rate. (b) The price level rises, and money demand increases by VD 80 bn at every interest rate. If the money supply does not change, calculate the new equilibrium rate. (c) The CBV wants to keep the rate at its original level. By how much must it change the money supply? (d) Suppose instead the CBV raises the money supply by only VD 40 bn. Calculate the equilibrium rate and compare it with your answers to (a) and (b). (e) A student says: “If the price level rises and the CBV increases the money supply at the same time, the interest rate must stay the same.” Evaluate this claim.
Model answer and suggested Marlbridge rubric
(a) 900 − 40i = 700, so 40i = 200 and i = 5%.
(b) New money demand: Qd = 980 − 40i. 980 − 40i = 700, so 40i = 280 and i = 7%.
(c) At 5%, the new quantity demanded is 980 − 40 × 5 = VD 780 bn. The CBV must raise the money supply from VD 700 bn to VD 780 bn, an increase of VD 80 bn.
(d) 980 − 40i = 740, so 40i = 240 and i = 6%. The rate is higher than the original 5% but lower than the 7% with no policy response.
(e) The claim is not correct in general. The higher price level shifts MD right, which raises the rate; the larger money supply shifts MS right, which lowers it. The overall effect depends on the sizes of the two shifts. The rate stays the same only if the money supply rises by exactly as much as money demand at the original rate (VD 80 bn here). If the shifts are not known, the change in the rate is indeterminate.
| Point | What earns it |
|---|---|
| 1 | i = 5% |
| 1 | i = 7% after the increase in money demand |
| 1 | Increase of VD 80 bn |
| 1 | i = 6%, between 5% and 7% |
| 1 | Explains that the two shifts push the rate in opposite directions, so the result depends on their relative sizes |
Accept values carried forward from an earlier error.
How did you do?
- Q1 or Q6(a) wrong: re-read “Money demand: why the curve slopes down” and “Money supply: why the curve is vertical” in the study guide.
- Q2, Q5 or Q6(d) wrong: revisit Worked example 1 and Figure 1.
- Q3, Q4 or Q6(b)–(c) wrong: revisit “What shifts the curves”.
- Q7 wrong: revisit Worked example 2, then try (e) again by sketching both shifts.
Then tick off the topic checklist.