These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country 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: inflation is measured on the vertical axis and unemployment on the horizontal axis; the economy is always on its current short-run Phillips curve. Where a question asks you to draw a graph, sketch it on paper.
Question 1 (multiple choice · foundation)
Valdoria’s natural rate of unemployment is 5%. The economy is on its short-run Phillips curve at an unemployment rate of 3.5% and an inflation rate of 5%. Which statement is correct?
- (A) The economy is in long-run equilibrium.
- (B) The economy is to the right of the LRPC, with a recessionary gap.
- (C) The economy is to the left of the LRPC, with an inflationary gap.
- (D) The LRPC must have shifted to 3.5%.
Answer and explanation
Answer: (C). Unemployment (3.5%) is below the natural rate (5%), so the point lies to the left of the vertical LRPC. Output is above full employment: an inflationary gap.
- (A) Long-run equilibrium requires unemployment at the natural rate, on the LRPC.
- (B) reverses the sides: right of the LRPC means unemployment above the natural rate.
- (D) confuses the actual unemployment rate with the natural rate. Only a change in the natural rate moves the LRPC.
Question 2 (multiple choice · core)
Valdoria’s central bank raises its policy rate sharply, and investment spending falls. Starting from long-run equilibrium, what is the short-run effect on the Phillips curve graph?
- (A) A movement down and to the right along the SRPC
- (B) A movement up and to the left along the SRPC
- (C) The SRPC shifts to the right
- (D) The LRPC shifts to the right
Answer and explanation
Answer: (A). Lower investment reduces AD, a demand shock. Output falls, so unemployment rises, and inflation falls. That is a movement along the SRPC, down and to the right.
- (B) is the effect of an increase in AD.
- (C) treats a demand shock as if it shifted the SRPC. Only supply shocks (and long-run adjustment) shift it.
- (D) The natural rate has not changed, so the LRPC stays put.
Question 3 (multiple choice · core)
The world price of natural gas, used to generate most of Valdoria’s electricity, falls sharply and stays low for two years. Which of the following best describes the short-run effect?
- (A) SRAS shifts right and the SRPC shifts right.
- (B) SRAS shifts right and the SRPC shifts left.
- (C) AD shifts right and the economy moves up along the SRPC.
- (D) SRAS shifts left and the SRPC shifts left.
Answer and explanation
Answer: (B). Cheaper energy lowers production costs: a favourable supply shock. SRAS shifts right, so output rises (unemployment falls) and the price level rises less (inflation falls). Both fall together, so the SRPC shifts left.
- (A) moves the SRPC the same way as SRAS. They move in opposite directions.
- (C) treats a cost change as a demand shock.
- (D) gets the direction of the SRAS shift wrong: lower input prices shift SRAS right.
Question 4 (multiple choice · core)
Which of the following would shift Valdoria’s long-run Phillips curve to the right?
- (A) An increase in government spending on roads
- (B) A rise in the inflation rate that people expect
- (C) A temporary rise in the price of imported oil
- (D) A long-lasting mismatch between workers’ skills and the skills firms need
Answer and explanation
Answer: (D). A skills mismatch raises structural unemployment, which raises the natural rate of unemployment. The LRPC, vertical at the natural rate, shifts right.
- (A) is a demand shock: a movement along the SRPC.
- (B) shifts the SRPC (right), not the LRPC.
- (C) is a temporary adverse supply shock: it shifts the SRPC, not the natural rate.
Question 5 (data analysis · core)
A decade earlier, Valdoria’s natural rate of unemployment was 6.0% and its labour force was 20.0 million. Its SRPC passed through these points:
| Unemployment rate | 4% | 5% | 6% | 7% | 8% |
|---|---|---|---|---|---|
| Inflation rate | 6.0% | 4.5% | 3.0% | 1.5% | 0.0% |
(a) State the inflation rate in long-run equilibrium. (b) The economy was at 5% unemployment. Identify the type of gap and calculate how many fewer people were unemployed than at the natural rate. (c) By how many percentage points does inflation change for each 1 percentage point change in unemployment along this SRPC? (d) From the point in (b), the central bank uses contractionary policy to bring inflation down to 1.5%. Using the table, state the new unemployment rate in the short run, and calculate the increase in the number of people unemployed.
Worked solution
(a) Long-run equilibrium is at the natural rate, 6%: inflation 3.0%.
(b) 5% is below the natural rate: an inflationary gap. 1 percentage point × 20.0 million = 0.2 million fewer people unemployed.
(c) 1.5 percentage points (for example, from 6% to 5% unemployment, inflation rises from 3.0% to 4.5%).
(d) Inflation of 1.5% is at 7% unemployment. Unemployment rises by 7 − 5 = 2 percentage points: 0.02 × 20.0 million = 0.4 million more people unemployed. The economy is now in a recessionary gap, 1 percentage point to the right of the LRPC.
Suggested mark points (4): 1 for 3.0%; 1 for the inflationary gap with 0.2 million; 1 for 1.5 percentage points; 1 for 7% and 0.4 million. Accept values carried forward from an earlier error.
Question 6 (constructed response · core)
Valdoria is in long-run equilibrium with unemployment at its natural rate of 5% and inflation of 3%. The government then makes a large, lasting cut in its spending.
(a) Draw a correctly labelled Phillips curve graph showing the SRPC, the LRPC and the long-run equilibrium. Label the equilibrium A, and show the values 5% and 3%. (b) On your graph, show the short-run effect of the spending cut. Label the new point B. (c) Explain the change in unemployment from A to B, using the effect on real output. (d) Assume no further policy action. Explain what happens to the SRPC in the long run and show the long-run point C on your graph. (e) Compare the inflation rate at C with the inflation rate at A.
Worked solution and suggested Marlbridge rubric
(a) Inflation rate (%) on the vertical axis, unemployment rate (%) on the horizontal axis. A vertical LRPC at 5%; a downward-sloping SRPC crossing it at A, with inflation 3%.
(b) B lies on the same SRPC, down and to the right of A: unemployment above 5% and inflation below 3%.
(c) The spending cut lowers AD, so real output falls below full employment. Firms need fewer workers, so unemployment rises above the natural rate (a recessionary gap).
(d) With unemployment high and inflation lower than expected, nominal wages and other input prices grow more slowly or fall. SRAS shifts right, so the SRPC shifts left. The economy moves to C on the new SRPC where it crosses the LRPC: unemployment back at 5%.
(e) Inflation at C is lower than 3%.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled axes, vertical LRPC at 5%, downward-sloping SRPC, A at (5%, 3%) |
| 1 | B on the original SRPC, down and to the right of A |
| 1 | Explains lower AD → lower real output → higher unemployment |
| 1 | SRPC shifts left in the long run, explained by slower growth of wages or input prices |
| 1 | C on the LRPC at 5%, with inflation below 3% |
In (b), shifting the SRPC instead of moving along it does not earn the point. In (d), “the economy self-corrects” without a curve shift and a reason does not earn the point.
Question 7 (constructed response · stretch)
Valdoria is in long-run equilibrium at 5% unemployment and 2% inflation. A storm destroys a large share of the harvest and damages ports for a year, and the economy moves to 6.5% unemployment and 5% inflation.
(a) Identify the type of shock and the direction of the shift in the SRPC. Explain how you know from the data. (b) State the direction of the change in SRAS, real output and the price level in the AD–AS model. (c) The central bank responds by raising its policy rate. Explain the short-run effect on unemployment and on inflation, using the Phillips curve. (d) Explain why the LRPC does not shift in this case.
Model answer and suggested Marlbridge rubric
(a) An adverse supply shock. Compared with the starting point, unemployment rose by 1.5 percentage points and inflation rose by 3 percentage points. Along one downward-sloping SRPC they would move in opposite directions, so the SRPC shifted right.
(b) SRAS shifts left; real output falls; the price level rises.
(c) A higher policy rate reduces investment and consumption, so AD falls: a movement down and to the right along the new SRPC. Inflation falls, but unemployment rises further, above 6.5%.
(d) The storm damage is temporary: once the ports are repaired and crops are replanted, the economy’s normal levels of frictional and structural unemployment are unchanged. The natural rate has not changed, so the LRPC stays where it was.
| Point | What earns it |
|---|---|
| 1 | Adverse supply shock with SRPC shifting right |
| 1 | Uses the data: unemployment and inflation both rose |
| 1 | SRAS left, real output down, price level up |
| 1 | Movement along the new SRPC: inflation falls, unemployment rises |
| 1 | LRPC unchanged because the natural rate is unchanged (temporary shock) |
In (c), an answer that shows the SRPC shifting because of the rate rise does not earn the point.
How did you do?
- Q1 or Q5(a)–(b) wrong: re-read “Equilibrium and gaps on the graph” in the study guide.
- Q2, Q5(d) or Q6(b)–(c) wrong: work through Worked example 1 again (demand shocks move along the SRPC).
- Q3 or Q7 wrong: revisit “Supply shocks shift the SRPC” and Worked example 2.
- Q4 wrong: revisit “What shifts the LRPC”.
- Q6(d)–(e) wrong: see Worked example 1(d) and Figure 1 on long-run adjustment.
Then tick off the topic checklist.