This diagnostic helps you find which Unit 2 topics to revisit. It has one or two short questions on each topic, 2.1 to 2.7. Answer every question before opening any answer; allow about 30 minutes.
These are original Marlbridge practice questions, not past exam questions. The set is not calibrated, so it gives no predicted score. Valdoria is a fictional country whose currency is the valda (VD); all data are fictional. A four-function calculator is enough. Round percentages to 2 decimal places at the last step.
Question 1 (multiple choice · 2.1)
Which of these is counted as investment (I) in Valdoria’s GDP?
- (A) A household buys VD 5,000 of shares in a furniture company.
- (B) A furniture maker’s stock of unsold tables rises by VD 2 million during the year.
- (C) The Valdorian government buys 40 new buses for the capital city.
- (D) A family buys a new car to drive to work.
Answer and explanation
Answer: (B). Unsold output made this year is added to inventories, and the change in inventories is part of investment.
- (A) Buying shares is a financial transaction, not spending on new capital goods.
- (C) A purchase by the government is G, not I, even though buses are capital goods.
- (D) A household’s new car is consumption (C). Only newly built housing counts as household investment.
If you missed this: read “1. The expenditure approach” in the Topic 2.1 study guide.
Question 2 (multiple choice · 2.2)
Valdoria’s real GDP per person rose by 4% last year. Which extra fact most suggests that a typical Valdorian household is not better off?
- (A) Valdoria’s population grew by 1% during the year.
- (B) Exports grew faster than imports.
- (C) Almost all of the extra income went to the richest 5% of households.
- (D) All of the extra output was sold in markets.
Answer and explanation
Answer: (C). GDP per person is an average. It ignores how income is shared, so most households may have gained little.
- (A) is tempting, but GDP per person already allows for population growth.
- (B) Export growth says nothing about how the gains are shared.
- (D) GDP measures market output well, so this makes the 4% more reliable, not less.
If you missed this: read “6. How income is shared” in the Topic 2.2 study guide.
Question 3 (multiple choice · 2.3)
A Valdorian who was caring for her children at home, and not looking for work, takes a paid job straight away. The adult population does not change. What happens?
- (A) The unemployment rate is unchanged and the participation rate rises.
- (B) Both rates are unchanged, because she was never unemployed.
- (C) The unemployment rate falls and the participation rate is unchanged.
- (D) The unemployment rate falls and the labor force participation rate rises.
Answer and explanation
Answer: (D). She moves from “not in the labor force” to “employed”. The labor force grows, so participation rises. The same number unemployed is divided by a larger labor force, so the unemployment rate falls slightly.
- (A) The count of unemployed is unchanged, but the rate has a bigger denominator.
- (B) She has joined the labor force.
- (C) Joining the labor force raises participation when the adult population is fixed.
If you missed this: read “How changes in the labor market move the rates” in the Topic 2.3 study guide.
Question 4 (multiple choice · 2.3)
Valdoria’s actual unemployment rate is 6.5%. Frictional unemployment is 2.0% and cyclical unemployment is 1.5% of the labor force. What are structural unemployment and the natural rate?
- (A) Structural 4.5%; natural rate 6.5%
- (B) Structural 3.0%; natural rate 5.0%
- (C) Structural 3.0%; natural rate 6.5%
- (D) Structural 3.0%; natural rate 3.5%
Answer and explanation
Answer: (B). Natural rate = actual − cyclical = 6.5 − 1.5 = 5.0%. Natural rate = frictional + structural, so structural = 5.0 − 2.0 = 3.0%.
- (A) treats the actual rate as the natural rate.
- (C) has the right structural rate but forgets that the natural rate excludes cyclical unemployment.
- (D) adds frictional and cyclical unemployment; the natural rate is frictional + structural.
If you missed this: read “The natural rate of unemployment” in the Topic 2.3 study guide.
Question 5 (multiple choice · 2.4)
Valdoria’s market basket cost VD 250 in the base year. This year the CPI is 112. What does the same basket cost this year?
- (A) VD 223.21
- (B) VD 262.00
- (C) VD 280.00
- (D) VD 362.00
Answer and explanation
Answer: (C). CPI = cost this year ÷ base-year cost × 100, so cost this year = 250 × 112 ÷ 100 = VD 280.
- (A) divides by 1.12 instead of multiplying.
- (B) adds 12 valdas instead of 12%.
- (D) adds the index number itself to the cost.
If you missed this: read “The consumer price index (CPI)” in the Topic 2.4 study guide.
Question 6 (multiple choice · 2.5)
A union and an employer agree a three-year contract with wage rises of 6% a year. Both expect inflation of 4% a year. In fact inflation is only 1% a year. Which statement is correct?
- (A) The employer gains, because it pays wages that are worth less than planned.
- (B) Neither side gains, because inflation was still positive.
- (C) The workers lose, because lower inflation means their wages rise more slowly.
- (D) The workers gain and the employer loses, because each wage rise buys more than both sides planned.
Answer and explanation
Answer: (D). The 6% rises are fixed in valdas. With 1% inflation instead of 4%, real wages rise by about 5% a year, not the planned 2%. The surprise moves purchasing power from the employer to the workers.
- (A) describes inflation that is higher than expected.
- (B) What matters is the gap between actual and expected inflation.
- (C) The contract fixes the nominal rises at 6%.
If you missed this: read “Other winners and losers” in the Topic 2.5 study guide.
Question 7 (multiple choice · 2.6)
Between two years, Valdoria’s nominal GDP rises by 6% and its GDP deflator rises from 110 to 115.5. What happened to real GDP?
- (A) It rose by about 0.95%.
- (B) It rose by about 11%.
- (C) It fell by about 0.95%.
- (D) It rose by 6%.
Answer and explanation
Answer: (A). The deflator rose by 5.5 ÷ 110 × 100 = 5%. Real GDP changes by 1.06 ÷ 1.05 = 1.0095, a rise of 0.95% (the shortcut 6% − 5% = 1% is close).
- (B) adds inflation to nominal growth instead of taking it away.
- (C) has the wrong sign: spending grew faster than prices.
- (D) is nominal growth, which ignores prices.
If you missed this: read “The calculations” and Worked example 2 in the Topic 2.6 study guide.
Question 8 (multiple choice · 2.7)
Valdoria’s real GDP has risen for three quarters in a row, but it is still below potential output. Which description fits?
- (A) An expansion with a negative (recessionary) output gap
- (B) A recession, because output is below potential
- (C) An expansion with a positive (inflationary) output gap
- (D) A trough, because unemployment is above the natural rate
Answer and explanation
Answer: (A). The phase depends on the direction of real GDP: rising means expansion. The gap depends on its level compared with potential: below potential means a negative gap.
- (B) A recession needs real GDP to fall.
- (C) A positive gap needs output above potential.
- (D) A trough is a single turning point; real GDP has already risen for three quarters.
If you missed this: read “Potential output and the output gap” in the Topic 2.7 study guide.
Question 9 (short answer · 2.4)
A student in Valdoria paid monthly rent of VD 400 in 2023, when the CPI was 104. In 2026 the CPI is 117 and the rent is VD 460.
(a) Express the 2023 rent in 2026 valdas. (b) Has the real rent risen or fallen? Support your answer with a percentage. (c) A cheaper shared flat becomes popular as rents rise. Explain why the CPI may overstate the rise in students’ cost of living.
Worked answer
(a) 400 × 117 ÷ 104 = VD 450 in 2026 valdas.
(b) Real rent has risen: (460 − 450) ÷ 450 × 100 = 2.22%. Prices rose by 12.5% and the rent by 15%, a little faster.
(c) The CPI prices a fixed basket. As rent rises faster than other prices, students switch to cheaper shared flats. The fixed basket ignores the switch, so it overstates their extra spending: substitution bias.
If you missed this: read “Using an index to compare values across years” and “Why the CPI may overstate inflation” in the Topic 2.4 study guide.
Question 10 (short answer · 2.6)
A toy Valdorian economy has the data below. Quantities are in millions and prices in VD. The base year is 2025.
| Product | 2025 quantity | 2025 price | 2026 quantity | 2026 price |
|---|---|---|---|---|
| Packets of tea sold to households (kg) | 50 | VD 8 | 55 | VD 9 |
| Scooters sold to households | 4 | VD 250 | 4.2 | VD 270 |
| Fresh tea leaves sold to tea factories (kg) | 60 | VD 3 | 65 | VD 3.20 |
(a) Calculate nominal GDP in 2025 and 2026. (b) Calculate real GDP in 2026. (c) Calculate the GDP deflator for 2026 and the growth rate of real GDP.
Worked answer
(a) The tea leaves are an intermediate good (their value is inside the packet price), so leave them out. 2025: 50 × 8 + 4 × 250 = 400 + 1,000 = VD 1,400 million. 2026: 55 × 9 + 4.2 × 270 = 495 + 1,134 = VD 1,629 million.
(b) 2026 quantities at 2025 prices: 55 × 8 + 4.2 × 250 = 440 + 1,050 = VD 1,490 million.
(c) Deflator = 1,629 ÷ 1,490 × 100 = 109.33. Real growth = (1,490 − 1,400) ÷ 1,400 × 100 = 6.43%, against nominal growth of 16.36%.
If you missed this: for (a) see Worked example 3 in the Topic 2.1 study guide; for (b)–(c), Worked example 1 in the Topic 2.6 study guide.
Question 11 (short answer · 2.7)
Valdoria’s real GDP and potential real GDP (VD billion, constant prices) over six quarters:
| Quarter | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Actual real GDP | 202 | 205 | 204 | 199 | 197 | 200 |
| Potential real GDP | 200 | 201 | 202 | 203 | 204 | 205 |
(a) Identify the quarter of the peak and the quarter of the trough. (b) Calculate the output gap at the trough, in VD billion and as a percentage of potential output. (c) The natural rate of unemployment is 4.5%, and in Quarter 5 the unemployment rate is 6.6%. Calculate cyclical unemployment.
Worked answer
(a) Peak: Quarter 2 (205). Trough: Quarter 5 (197).
(b) 197 − 204 = −VD 7 billion, or −7 ÷ 204 × 100 = −3.43% of potential: a recessionary gap. (Divide by potential, not by actual output.)
(c) 6.6% − 4.5% = 2.1 percentage points, which fits the negative gap.
If you missed this: read Worked examples 1 and 2 in the Topic 2.7 study guide.
Your next step
| Topic | Question(s) | If you missed it, read |
|---|---|---|
| 2.1 The circular flow and GDP | 1, 10(a) | Circular flow and GDP study guide |
| 2.2 Limitations of GDP | 2 | Limitations of GDP study guide |
| 2.3 Unemployment | 3, 4, 11(c) | Unemployment study guide |
| 2.4 Price indices and inflation | 5, 9 | Price indices and inflation study guide |
| 2.5 Costs of inflation | 6 | Costs of inflation study guide |
| 2.6 Real v. nominal GDP | 7, 10(b)–(c) | Real v. nominal GDP study guide |
| 2.7 Business cycles | 8, 11 | Business cycles study guide |
How to use your result
- No mistakes in a topic: tick it off, but try its practice set once.
- One mistake: read the section named in the answer, then redo the question without looking.
- Two or more mistakes, or a guess: work through that topic’s study guide and practice set.
- Several formula slips (Questions 5, 7, 9 or 11(b)): revisit Topics 2.4 and 2.6 together.
Then try the mixed unit review, whose questions combine several topics.