These are original Marlbridge practice questions, not past exam questions. All questions use Valdoria, a fictional country whose currency is the valda (VD), and Kestria, a fictional country whose currency is the kesta (KS); all prices and figures are fictional. The rubrics are a suggested Marlbridge rubric to help you check your work; they are not an official scoring guideline. Assumptions: exchange rates are flexible and written as KS per VD; producers do not change their own prices unless told; other things are equal; a four-function calculator is enough.
Question 1 (multiple choice · foundation)
The valda appreciates against the kesta. Other things equal, which of the following describes the effect on Valdoria?
- (A) Exports fall, imports rise and net exports fall.
- (B) Exports rise, imports fall and net exports rise.
- (C) Exports fall, imports fall and net exports do not change.
- (D) Exports rise, imports rise and net exports rise.
Answer and explanation
Answer: (A). After the appreciation each Valdorian good costs Kestrian buyers more kestas, so exports fall. Each Kestrian good costs Valdorians fewer valdas, so imports rise. Both changes lower X − M.
- (B) describes a depreciation of the valda.
- (C) gets the import effect wrong: cheaper foreign goods mean Valdorians buy more of them, not fewer.
- (D) assumes a “strong” currency helps exporters. It makes their goods dearer abroad, so exports fall.
Question 2 (multiple choice · core)
The exchange rate changes from 1 VD = 5 KS to 1 VD = 4 KS. A Valdorian electric fan costs VD 30, and the producer does not change this price. What happens to the price of the fan for a buyer in Kestria?
- (A) It falls from KS 150 to KS 120.
- (B) It rises from KS 6.00 to KS 7.50.
- (C) It rises from KS 120 to KS 150.
- (D) It rises from KS 150 to KS 187.50.
Answer and explanation
Answer: (A). Price in KS = price in VD × (KS per VD). Before: 30 × 5 = KS 150. After: 30 × 4 = KS 120. The valda has depreciated, so the fan is cheaper for Kestrians.
- (B) divides instead of multiplying (30 ÷ 5 and 30 ÷ 4). Dividing converts a kesta price into valdas, which is the wrong direction here.
- (C) swaps the before and after values.
- (D) increases the price by 25%, as if a weaker valda made Valdorian goods dearer abroad. It makes them cheaper.
Question 3 (multiple choice · core)
Valdoria is in a recession. The valda then depreciates against the kesta. Other things equal, what are the short-run effects on Valdoria’s real GDP, price level and unemployment rate?
- (A) Real GDP rises, the price level rises and unemployment falls.
- (B) Real GDP falls, the price level falls and unemployment rises.
- (C) Real GDP rises, the price level falls and unemployment falls.
- (D) Real GDP does not change, the price level rises and unemployment does not change.
Answer and explanation
Answer: (A). The depreciation raises exports and lowers imports, so net exports rise and AD shifts right. Along an upward-sloping SRAS curve, real GDP and the price level both rise. Firms need more workers to produce more output, so unemployment falls.
- (B) is the effect of an appreciation, which lowers net exports and AD.
- (C) describes a rightward shift of SRAS, not AD. A rise in AD raises the price level.
- (D) describes a long-run outcome at full employment. In the short run, and starting from a recession, output responds.
Question 4 (multiple choice · core)
Kestrian investors decide to hold fewer Valdorian financial assets. Other things equal, which of the following correctly describes the effect on the valda and on Kestria’s net exports?
- (A) The valda appreciates, and Kestria’s net exports rise.
- (B) The valda depreciates, and Kestria’s net exports fall.
- (C) The valda depreciates, and Kestria’s net exports rise.
- (D) Nothing changes, because no goods or services were traded.
Answer and explanation
Answer: (B). Kestrians need fewer valdas, so the demand for valdas falls and the valda depreciates. The kesta therefore appreciates. Kestrian goods become dearer in Valdoria and Valdorian goods cheaper in Kestria, so Kestria’s exports fall, its imports rise, and its net exports fall.
- (A) gets the direction of the valda wrong: lower demand for a currency lowers its value.
- (C) gives the effect on Valdoria’s net exports, not Kestria’s. The two countries move in opposite directions.
- (D) ignores that demand for a currency also comes from demand for a country’s financial assets. The change in the exchange rate then affects trade.
Question 5 (calculation · core)
The exchange rate changes from 1 VD = 2.5 KS to 1 VD = 2.25 KS. A Kestrian tractor costs KS 45,000 and a bale of Valdorian cotton cloth costs VD 400; neither producer changes its price.
(a) State which currency appreciated, and calculate the percentage change in the value of each currency. (b) Calculate the price of the tractor in Valdoria and the price of the cloth in Kestria, before and after. (c) Valdoria’s exports change from VD 210 billion to VD 228 billion and its imports from VD 236 billion to VD 224 billion. Calculate net exports before and after, and state the effect on Valdoria’s AD.
Worked solution
(a) The valda now buys fewer kestas, so the kesta appreciated and the valda depreciated. Valda: (2.25 − 2.5) ÷ 2.5 × 100 = −10%. Kesta: one kesta was worth 1 ÷ 2.5 = VD 0.40 and is now worth 1 ÷ 2.25 = VD 0.4444, so the change is (2.5 ÷ 2.25 − 1) × 100 = +11.11%.
(b) Tractor: 45,000 ÷ 2.5 = VD 18,000 before; 45,000 ÷ 2.25 = VD 20,000 after. Cloth: 400 × 2.5 = KS 1,000 before; 400 × 2.25 = KS 900 after.
(c) NX before = 210 − 236 = −VD 26 billion. NX after = 228 − 224 = +VD 4 billion. NX rise by VD 30 billion, so AD shifts right (by more than VD 30 billion once the multiplier works through).
Check. The figures match the theory: the cheaper cloth sells more abroad (X up), and the dearer tractor sells less in Valdoria (M down).
Suggested mark points (4): 1 for identifying the kesta as the appreciating currency; 1 for both percentage changes; 1 for all four prices; 1 for both NX values with the conclusion that AD shifts right.
Question 6 (constructed response · core)
Valdoria is in long-run equilibrium. Kestrian investors then sell a large number of shares in Valdorian companies and convert the proceeds into kestas.
(a) Draw a correctly labelled graph of the foreign exchange market for valdas. Show the effect of the investors’ decision on the exchange rate of the valda. (b) What happens to Valdoria’s exports to Kestria? Explain. (c) Draw a correctly labelled AD–AS graph for Valdoria. Show the short-run effect of the change in (b) on real GDP and the price level. (d) What happens to Valdoria’s unemployment rate in the short run? Explain. (e) What happens to the value of the kesta relative to the valda?
Worked solution and suggested Marlbridge rubric
(a) Axes: “Exchange rate (KS per VD)” on the vertical axis and “Quantity of valdas” on the horizontal axis, with a downward-sloping demand curve and an upward-sloping supply curve. To convert their money into kestas, Kestrian investors supply valdas in exchange for kestas, so the supply of valdas shifts right and the exchange rate falls from e₁ to e₂. (Fewer Kestrians wanting Valdorian shares also means less demand for valdas, so shifting the demand curve left is also accepted.) Either way the valda depreciates.
(b) Exports rise. Each Valdorian good now costs Kestrian buyers fewer kestas, so they buy more of them.
(c) Axes: price level and real GDP, with a downward-sloping AD, an upward-sloping SRAS and a vertical LRAS at full-employment output (Yf), all meeting at the start. Higher exports raise net exports, so AD shifts right. The new short-run equilibrium has real GDP above Yf and a higher price level.
(d) Unemployment falls below the natural rate. Firms are producing more output, so they hire more workers.
(e) The kesta appreciates against the valda: each kesta now buys more valdas.
| Point | What earns it |
|---|---|
| 1 | Correctly labelled foreign exchange market graph (axes, D and S) |
| 1 | Supply of valdas shifts right (or demand left) with a lower exchange rate shown |
| 1 | Exports rise, because Valdorian goods are cheaper for Kestrians |
| 1 | Correctly labelled AD–AS graph with AD shifted right and higher real GDP and price level shown |
| 1 | Unemployment falls, linked to higher output |
| 1 | The kesta appreciates |
In (b), “exports rise” with no reason earns no point. In (c), carry forward from (b): if (b) said exports fall, a leftward AD shift with lower output and price level is consistent and earns the graph point.
Question 7 (constructed response · stretch)
Valdoria’s real GDP is VD 1,080 billion and full-employment output is VD 1,000 billion. A Valdorian minister says: “A stronger valda would help bring inflation down.”
(a) Explain how an appreciation of the valda would affect Valdoria’s aggregate demand. (b) Suppose the appreciation lowers net exports by VD 8 billion and the MPC is 0.75. Calculate the change in AD. Would this alone close the output gap? Explain. (c) A student writes: “An appreciation lowers prices of imports, so Valdoria’s price level falls and the economy moves down along its AD curve.” Identify the error and correct it.
Model answer and suggested Marlbridge rubric
(a) An appreciation makes Valdorian goods dearer for Kestrian buyers, so exports fall, and makes Kestrian goods cheaper for Valdorians, so imports rise. Net exports fall, so AD shifts left. This lowers the price level (or the inflation rate) and real output, so the minister’s claim is consistent with the model.
(b) Multiplier = 1 ÷ (1 − 0.75) = 4. AD shifts left by 8 × 4 = VD 32 billion at each price level. The output gap is 1,080 − 1,000 = VD 80 billion. A 32 billion shift is smaller than the gap, and equilibrium real GDP falls by less than 32 billion because the price level also falls along SRAS. So the appreciation alone would not close the gap.
(c) The error is treating the change as a movement along AD. A movement along AD happens only when the price level itself changes for some other reason. Here the exchange rate changed for a reason other than Valdoria’s price level, so net exports change at every price level and the whole AD curve shifts left. The fall in the price level is a result of that shift.
| Point | What earns it |
|---|---|
| 1 | Exports fall and imports rise, with the price reasons |
| 1 | NX fall, so AD shifts left |
| 1 | AD shift of VD 32 billion using a multiplier of 4 |
| 1 | Not enough: compares with the VD 80 billion gap (or notes output falls by less than 32 billion) |
| 1 | Identifies movement vs shift and explains that AD shifts because NX change at every price level |
In (b), accept “not enough” supported by either comparison.
How did you do?
- Q1, Q4 or Q6(b) wrong: re-read “How an appreciation changes trade” in the study guide.
- Q2 or Q5 wrong: practise the two conversion rules in “Our fictional economies” and Worked example 1.
- Q3, Q6(c)–(d) or Q7(a) wrong: revisit “From net exports to aggregate demand” and Worked example 2.
- Q7(c) wrong: see the “movement along AD” point in “Common misconceptions”.
Then tick off the topic checklist.