These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD), or other clearly fictional data. The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Assumptions: a four-function calculator is enough; round percentages to 2 decimal places and money to the nearest valda; “in the long run” means after wages and prices have fully adjusted and new capital is in use.
Question 1 (multiple choice · foundation)
Which of the following is an example of a supply-side fiscal policy?
- (A) The central bank lowers its policy interest rate to encourage borrowing.
- (B) The government cuts the marginal income tax rate on earnings so that each extra hour of work pays more after tax.
- (C) The government raises its purchases of office supplies to close a recessionary gap.
- (D) The government sends a one-off cash payment to every household during a recession.
Answer and explanation
Answer: (B). A supply-side fiscal policy changes taxes or spending to change incentives to work, save, invest or innovate. A lower marginal tax rate raises the reward for extra work, so participation and hours can rise, shifting aggregate supply right.
- (A) is monetary policy, carried out by the central bank, not fiscal policy.
- (C) is demand-side fiscal policy. It raises AD but does not change incentives or capacity.
- (D) raises disposable income and AD, but it does not change the reward for working, saving or investing. It is a demand policy.
Question 2 (multiple choice · core)
Valdoria’s government pays for a national broadband network that will reach every town. Which row best describes the most likely effects?
- (A) Short run: AD shifts right. Long run: LRAS shifts right.
- (B) Short run: AD shifts left. Long run: LRAS shifts left.
- (C) Short run: LRAS shifts right, with no change in AD. Long run: no further effect.
- (D) Short run: AD shifts right. Long run: LRAS does not change, so only the price level is higher.
Answer and explanation
Answer: (A). Building the network is government spending, so AD shifts right in the short run. Once it is in use, firms and workers can produce more with the same resources, so productivity rises and LRAS shifts right.
- (B) reverses both effects. Spending raises AD, and better infrastructure adds capacity.
- (C) gets the timing wrong. Spending enters AD at once; capacity rises only when the network is working.
- (D) would be right for a pure demand policy, such as a one-off transfer. Infrastructure is public capital, so it does raise capacity.
Question 3 (multiple choice · core)
A fictional country has a population of 10 million, of whom 8 million are of working age. Output per worker stays at VD 40,000. A new policy raises employment from 4.5 million to 5.0 million, and the population does not change. By how much does real GDP per capita rise?
- (A) 0%, because output per worker did not change
- (B) 6.25%
- (C) 10.00%
- (D) 11.11%
Answer and explanation
Answer: (D). Before: 4.5 million × 40,000 ÷ 10 million = VD 18,000. After: 5.0 million × 40,000 ÷ 10 million = VD 20,000. Growth = (20,000 − 18,000) ÷ 18,000 × 100 = 11.11%.
- (A) forgets the second route to growth. With more people employed, the employed share of the population rises, so output per person rises even though output per worker does not.
- (B) is the change in the share of working-age adults in jobs in percentage points (62.5% − 56.25%), not the growth rate of real GDP per capita.
- (C) divides the rise of 0.5 million by the new employment (5.0 million). A growth rate uses the earlier value as the denominator.
Question 4 (multiple choice · core)
Valdoria is at full employment. Its government raises a tax on household spending and uses all the revenue to build new ports and power stations. Which outcome is most likely?
- (A) Valdoria’s PPC shifts outward as soon as construction starts, so it can produce more consumer goods this year.
- (B) Valdoria moves along its PPC towards capital goods now, and its PPC shifts outward in later years.
- (C) Valdoria moves from a point inside its PPC to a point on it, so no consumer goods are given up.
- (D) Valdoria’s PPC shifts inward, because households buy fewer consumer goods.
Answer and explanation
Answer: (B). At full employment, Valdoria is on its PPC. Resources used to build ports and power stations (public capital) cannot also make consumer goods, so the economy moves along its PPC towards capital goods. Once the new capital is in use, productivity rises and the PPC (and LRAS) shift outward.
- (A) gets the timing wrong. New capital adds to capacity only once it is built and working; this year Valdoria moves along its existing PPC.
- (C) describes an economy with idle resources. At full employment Valdoria is already on its PPC, so the consumer goods given up are the opportunity cost of the policy.
- (D) confuses a fall in consumption (a component of AD) with a fall in capacity. More public capital shifts the PPC outward, not inward.
Question 5 (calculation · core)
The table shows fictional data for Valdoria before and after a package of training and childcare policies.
| Year 1 | Year 2 | |
|---|---|---|
| Real GDP (VD billion, base-year prices) | 1,100 | 1,196 |
| Employed workers (million) | 22.0 | 23.0 |
| Population (million) | 50.0 | 50.5 |
(a) Calculate output per worker in each year and its growth rate. (b) Calculate real GDP per capita in each year and its growth rate. (c) Explain why the growth rate of real GDP per capita is higher than the growth rate of output per worker but lower than the growth rate of real GDP.
Worked solution and suggested Marlbridge rubric
(a) Year 1: 1,100 billion ÷ 22.0 million = VD 50,000. Year 2: 1,196 billion ÷ 23.0 million = VD 52,000. Growth = (52,000 − 50,000) ÷ 50,000 × 100 = 4.00%.
(b) Year 1: 1,100 billion ÷ 50.0 million = VD 22,000. Year 2: 1,196 billion ÷ 50.5 million = VD 23,683 (23,683.17). Growth = (23,683.17 − 22,000) ÷ 22,000 × 100 = 7.65%.
(c) Real GDP per capita rose faster than productivity because the employed share of the population also rose, from 22.0 ÷ 50.0 = 0.44 to 23.0 ÷ 50.5 = 0.4554 (a rise of 3.51%). This is the participation effect of the childcare policy. Check: 1.04 × 1.0351 = 1.0765. Real GDP grew faster still, by 8.73%, because part of its growth reflects the 1.00% rise in population, which does not raise output per person.
| Point | What earns it |
|---|---|
| 1 | Correct output per worker in both years and 4.00% growth |
| 1 | Correct real GDP per capita in both years and 7.65% growth |
| 1 | Explains the gap with productivity by a rise in the employed share of the population |
| 1 | Explains the gap with real GDP by population growth |
Accept answers carried forward from an earlier error. The shortcut 4.00% + 3.51% = 7.51% is acceptable as a check if labelled approximate.
Question 6 (constructed response · core)
Valdoria is in long-run equilibrium at full-employment output. The government permanently lowers marginal income tax rates on earnings, financing the cut by borrowing.
(a) Draw a correctly labelled AD–AS graph showing the initial long-run equilibrium, labelled E₁, with the price level PL₁ and output Yf₁. (b) On your graph, show the short-run effect of the tax cut on aggregate demand. Label the new short-run equilibrium E₂. Explain why AD shifts. (c) Explain how the tax cut could shift LRAS to the right in the long run. (d) Can you say for certain whether the long-run price level will be above, below or equal to PL₁? Explain. (e) Using the loanable funds market, explain one way the borrowing could reduce the long-run growth effect of the policy.
Model answer and suggested Marlbridge rubric
(a) Axes: price level (vertical) and real GDP (horizontal). A downward-sloping AD₁, an upward-sloping SRAS₁ and a vertical LRAS₁ meet at E₁, with PL₁ on the vertical axis and Yf₁ on the horizontal axis.
(b) AD shifts right to AD₂. Lower taxes raise disposable income, so consumption rises. E₂ is where AD₂ crosses SRAS₁: real output above Yf₁ and a price level above PL₁.
(c) Each extra hour of work now keeps more of its reward, so more adults choose to join the labour force and some work more hours. More labour raises the economy’s capacity, so LRAS (and SRAS) shift right.
(d) No. AD has shifted right, which pushes the price level up; SRAS and LRAS have shifted right, which pushes it down. The long-run price level depends on the relative sizes of these shifts, so it could be higher, lower or equal to PL₁. What is certain is that full-employment output rises.
(e) Government borrowing raises the demand for loanable funds. The real interest rate rises, so interest-sensitive private investment falls (crowding out). Less investment means slower growth in the capital stock, so productivity grows more slowly and LRAS shifts right by less than it otherwise would.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled graph with AD, SRAS and a vertical LRAS meeting at E₁, PL₁ and Yf₁ |
| 1 | AD shifts right with E₂ at higher output and price level, explained by higher disposable income and consumption |
| 1 | LRAS shifts right, explained by the incentive to work (participation or hours) |
| 1 | States the long-run price level is uncertain because AD and AS both shift right |
| 1 | Borrowing raises the real interest rate, lowers private investment and so slows capital accumulation |
In (c), “LRAS shifts right” with no incentive explained does not earn the point. In (e), a correct loanable funds graph with a rightward demand shift may replace part of the explanation.
Question 7 (constructed response · stretch)
Valdoria’s government has VD 5 billion a year to spend for ten years. Minister X proposes a yearly cash transfer to every household. Minister Y proposes the same sum for apprenticeships and public research. The economy is currently at full employment.
(a) For each proposal, identify the short-run effect on AD. (b) Explain which proposal is more likely to raise real GDP per capita in the long run. (c) Use a PPC with capital goods (including human capital) on one axis and consumer goods on the other to explain the opportunity cost of Minister Y’s proposal. (d) Explain why Minister X’s proposal, at full employment, mainly raises the price level in the long run.
Model answer and suggested Marlbridge rubric
(a) X: transfers raise disposable income and consumption, so AD shifts right. Y: the government buys training and research services, so G rises and AD shifts right.
(b) Minister Y’s. Apprenticeships raise workers’ skills (human capital) and research produces new technology. Both raise output per worker, so LRAS shifts right and real GDP per capita grows. Minister X’s transfers raise spending but do not raise skills, capital or technology, so capacity is unchanged.
(c) At full employment Valdoria is on its PPC. Using resources for training and research is a move along the PPC towards capital goods, so fewer consumer goods are produced now. That lost consumption is the opportunity cost. In return, the PPC shifts outward further in later years.
(d) With LRAS unchanged and the economy already at Yf, a rightward AD shift raises output above Yf only for a time. As wages and other input prices rise, SRAS shifts left and output returns to Yf. The lasting result is a higher price level, not more output.
| Point | What earns it |
|---|---|
| 1 | AD shifts right under both proposals, with the correct reason for each |
| 1 | Chooses Y, linking human capital or technology to higher productivity and a rightward LRAS shift |
| 1 | Opportunity cost: fewer consumer goods now, shown as a move along the PPC towards capital goods |
| 1 | X: AD right at full employment, with input prices adjusting so output returns to Yf at a higher price level |
In (b), “Y is better for growth” without a channel (skills, technology or productivity) earns no point.
How did you do?
- Q1 or Q7(a)–(b) wrong: re-read “Supply-side fiscal policy” and Worked example 2 in the study guide.
- Q2 wrong: revisit “Government investment in infrastructure and technology”.
- Q3 or Q5 wrong: revisit “Why policy can change long-run growth” and Worked example 1.
- Q4 or Q7(c) wrong: revisit “Trade-offs and limits” and Figure 2.
- Q6 wrong: study Figure 1, then revisit crowding out in Topic 5.5.
Then tick off the topic checklist.