This diagnostic helps you find which Unit 3 topics to revisit: one question on each topic, 3.1 to 3.9, and a second on 3.2, 3.6 and 3.8. Answer everything before opening any answer (about 30 minutes).
These are original Marlbridge practice questions, not past exam questions. The set is not calibrated and gives no predicted score. Valdoria and Kestria are fictional countries using the valda (VD); data are fictional, in VD billion at base-year prices, and apply only to their own question. A four-function calculator is enough. Multipliers use the simple model (constant MPC, saving the only leakage).
Question 1 (multiple choice · 3.1)
Which event alone shifts Valdoria’s aggregate demand (AD) curve right?
- (A) Valdorian households buy more imported cars at every price level.
- (B) Valdoria’s price level falls by 2%.
- (C) The valda depreciates for a reason unrelated to Valdoria’s price level.
- (D) The central bank raises its policy interest rate.
Answer and explanation
Answer: (C). A depreciation makes exports cheaper and imports dearer, so net exports rise at every price level.
- (A) Imports are subtracted in NX, so AD shifts left.
- (B) is a movement along AD.
- (D) A policy rate rise cuts investment: AD shifts left.
If you missed this: Topic 3.1 study guide, “What shifts the AD curve”.
Question 2 (multiple choice · 3.2)
When Valdoria’s disposable income rises by VD 50 billion, saving rises by VD 10 billion. Exports fall by VD 6 billion at every price level. What is the change in AD?
- (A) −VD 7.5 billion
- (B) −VD 30 billion
- (C) −VD 24 billion
- (D) −VD 1.2 billion
Answer and explanation
Answer: (B). MPS = 10 ÷ 50 = 0.2, so the spending multiplier = 1 ÷ 0.2 = 5. ΔAD = 5 × (−6) = −VD 30 billion.
- (A) divides by the MPC; the multiplier is 1 ÷ MPS.
- (C) uses the tax multiplier (−4) on a spending change.
- (D) multiplies by the MPS instead of dividing.
If you missed this: Topic 3.2 study guide, “The two multipliers”.
Question 3 (multiple choice · 3.3)
Which pair of events would both shift Valdoria’s short-run aggregate supply (SRAS) curve to the right?
- (A) Lower nominal wages, and higher world oil prices.
- (B) Higher output per worker, and a higher price level.
- (C) Lower taxes on business profits, and higher consumer confidence.
- (D) A per-unit subsidy to producers, and lower expected inflation.
Answer and explanation
Answer: (D). A subsidy lowers costs; lower expected inflation means smaller wage demands. Both shift SRAS right.
- (A) Dearer oil shifts SRAS left.
- (B) A higher price level is a movement along SRAS.
- (C) Consumer confidence shifts AD.
If you missed this: Topic 3.3 study guide, “What shifts the SRAS curve”.
Question 4 (multiple choice · 3.4)
A minister says: “If we accept 6% inflation every year, we can keep unemployment below the natural rate for good.” Which response is correct?
- (A) Right: along SRAS a higher price level always brings higher output.
- (B) Wrong: once wages and prices adjust fully, unemployment returns to the natural rate whatever the inflation rate.
- (C) Right, provided LRAS slopes upward like SRAS.
- (D) Wrong: higher inflation keeps unemployment permanently above the natural rate.
Answer and explanation
Answer: (B). LRAS is vertical at full-employment output (Yf). Renegotiated wages catch up with prices, so inflation buys no lasting output or jobs: no long-run trade-off.
- (A) The SRAS trade-off lasts only while wages are sticky.
- (C) LRAS is vertical.
- (D) Long-run unemployment is at the natural rate.
If you missed this: Topic 3.4 study guide, “No long-run trade-off between inflation and unemployment”.
Question 5 (multiple choice · 3.5)
Kestria’s full-employment output is VD 900 billion.
| Price level | 100 | 104 | 108 | 112 |
|---|---|---|---|---|
| AD (VD billion) | 930 | 910 | 890 | 870 |
| SRAS (VD billion) | 850 | 870 | 890 | 910 |
Which statement is correct?
- (A) Long-run equilibrium at 108, because AD equals SRAS.
- (B) Equilibrium at 108; positive gap of VD 10 billion; unemployment below the natural rate.
- (C) Equilibrium at 108; negative gap of VD 10 billion; unemployment above the natural rate.
- (D) Equilibrium at 110 and VD 900 billion, where SRAS meets LRAS.
Answer and explanation
Answer: (C). AD = SRAS = 890 at 108. Gap = 890 − 900 = −VD 10 billion (−1.11% of Yf): recessionary, so cyclical unemployment is positive.
- (A) Long-run equilibrium also needs output = Yf.
- (B) reverses the sign (actual − potential).
- (D) Short-run equilibrium is where AD crosses SRAS.
If you missed this: Topic 3.5 study guide, “Output gaps”.
Question 6 (multiple choice · 3.6)
Valdoria’s AD decreases and its SRAS increases. Which short-run result is certain?
- (A) The price level falls; the change in real output is indeterminate.
- (B) Real output falls; the change in the price level is indeterminate.
- (C) The price level and real output both fall.
- (D) The changes in the price level and in real output are both indeterminate.
Answer and explanation
Answer: (A). Both shifts push the price level down. Their effects on output conflict, so that change depends on which shift is larger.
- (B) swaps the two results.
- (C) looks only at the AD shift.
- (D) misses that the price effects agree.
If you missed this: Topic 3.6 study guide, “All four shocks from the same starting point”.
Question 7 (multiple choice · 3.7)
Kestria has an inflationary gap and no policy is used. Compared with this short-run position, what happens in the long run?
- (A) LRAS shifts right to the current output; the price level does not change.
- (B) Wages rise, SRAS shifts left; the price level and real GDP both fall.
- (C) The high price level shifts AD left until the price level is back where it started.
- (D) Wages rise, SRAS shifts left; the price level rises further, real GDP falls to Yf, unemployment rises to the natural rate.
Answer and explanation
Answer: (D). Scarce workers push nominal wages up. SRAS shifts left along the unchanged AD: the price level rises again and output falls back to Yf.
- (A) LRAS moves only with resources or technology.
- (B) A leftward SRAS shift raises the price level.
- (C) Self-adjustment shifts SRAS, not AD.
If you missed this: Topic 3.7 study guide, “Closing an inflationary gap”.
Question 8 (multiple choice · 3.8)
Valdoria has an inflationary gap of VD 24 billion; its MPC is 0.8. With a constant price level, which action alone closes the gap exactly?
- (A) Cut government spending by VD 6 billion
- (B) Cut transfer payments by VD 6 billion
- (C) Raise taxes by VD 4.8 billion
- (D) Raise government spending by VD 4.8 billion
Answer and explanation
Answer: (B). Spending multiplier 5, tax multiplier −4. A transfer cut works like a tax rise: 4 × 6 = VD 24 billion off AD.
- (A) removes 5 × 6 = 30, overshooting; the right G cut is 4.8.
- (C) removes only 4 × 4.8 = 19.2.
- (D) is expansionary and widens the gap.
If you missed this: Topic 3.8 study guide, “Calculating the change needed to close a gap”.
Question 9 (multiple choice · 3.9)
In a recession, Valdoria’s budget deficit grows from VD 20 billion to VD 35 billion, with no new tax or spending laws. What best explains this?
- (A) Tax rates fell automatically.
- (B) The government chose expansionary discretionary policy.
- (C) Tax revenue fell and transfer payments rose automatically as incomes fell.
- (D) The central bank cut interest rates, raising government spending.
Answer and explanation
Answer: (C). With unchanged rules, lower incomes bring in less tax and more households qualify for benefits. These automatic stabilizers need no new decision.
- (A) The rates stay the same; revenue falls.
- (B) needs a new decision; none was made.
- (D) is monetary policy.
If you missed this: Topic 3.9 study guide, “The idea: a fiscal policy that runs itself”.
Question 10 (short answer · 3.2)
Valdoria’s MPS is 0.4. Investment falls by VD 9 billion at every price level, and the government cuts income taxes by VD 9 billion.
(a) Calculate both multipliers. (b) Calculate the net change in AD. (c) How large a tax cut would have left AD unchanged? Why is it larger than VD 9 billion?
Worked answer
(a) MPC = 1 − 0.4 = 0.6. Spending multiplier = 1 ÷ 0.4 = 2.5. Tax multiplier = −0.6 ÷ 0.4 = −1.5.
(b) Investment: 2.5 × (−9) = −22.5. Tax cut: −1.5 × (−9) = +13.5. Net ΔAD = −VD 9 billion: AD shifts left.
(c) 22.5 ÷ 1.5 = VD 15 billion. Only 60% of a tax cut is spent at first (VD 5.4 billion of 9); lost investment is lost spending in full.
If you missed this: Topic 3.2 study guide, “Why the tax multiplier is smaller”.
Question 11 (short answer · 3.6)
Valdoria’s full-employment output is VD 900 billion; the natural rate of unemployment is 5.0%, and each VD 30 billion of output is 1 percentage point of unemployment. After a shock, AD is unchanged and the new short-run equilibrium price level is 103.
| Price level | 100 | 103 | 106 | 109 | 112 |
|---|---|---|---|---|---|
| AD (VD billion) | 960 | 930 | 900 | 870 | 840 |
| SRAS₁ (VD billion) | 840 | 870 | 900 | 930 | 960 |
(a) Which curve shifted, and which way? How do you know? (b) Find the new real output and the size of the shift, and write SRAS₂. (c) Calculate the percentage change in the price level and the new unemployment rate. Name the output gap and suggest one cause.
Worked answer
(a) SRAS shifted right. AD did not move and the price level fell from 106, so the economy moved down along AD.
(b) On AD at 103, output is VD 930 billion. SRAS₁ gave only 870 there, so SRAS rose by VD 60 billion. SRAS₂: 900, 930, 960, 990, 1,020.
(c) (103 − 106) ÷ 106 × 100 = −2.83%. Output is 30 above Yf, so unemployment = 5.0 − 1.0 = 4.0%. A positive output gap of VD 30 billion; possible cause: cheaper imported energy.
If you missed this: Topic 3.6 study guide, “Supply shocks: shifts of SRAS”.
Question 12 (short answer · 3.8)
Kestria’s real GDP is VD 864 billion, full-employment output is VD 900 billion and the MPC is 0.8. The price level is constant.
(a) Identify the gap and the type of fiscal policy needed. (b) The government will raise spending and cut taxes by the same amount. Calculate the amount that closes the gap. (c) Explain one reason why the policy might not work as planned.
Worked answer
(a) 864 − 900 = −VD 36 billion, a recessionary gap. Expansionary policy is needed.
(b) Spending multiplier = 1 ÷ 0.2 = 5; tax multiplier = −4. Each valda of the pair adds 5 + 4 = 9 to AD. 36 ÷ 9 = VD 4 billion of each. Check: 5 × 4 + 4 × 4 = 20 + 16 = 36.
(c) Lags. Recognising the gap, agreeing a plan and carrying it out take time. If the economy has recovered by then, the policy pushes output above Yf.
If you missed this: Topic 3.8 study guide, Worked example 1 and “Lags in discretionary fiscal policy”.
Your next step
Circle each question you got wrong or guessed.
| Topic | Question(s) | If you missed it, read |
|---|---|---|
| 3.1 Aggregate demand | 1 | Study guide 3.1 |
| 3.2 Multipliers | 2, 10 | Study guide 3.2 |
| 3.3 Short-run aggregate supply | 3 | Study guide 3.3 |
| 3.4 Long-run aggregate supply | 4 | Study guide 3.4 |
| 3.5 Equilibrium in the AD–AS model | 5 | Study guide 3.5 |
| 3.6 Changes in the AD–AS model in the short run | 6, 11 | Study guide 3.6 |
| 3.7 Long-run self-adjustment | 7 | Study guide 3.7 |
| 3.8 Fiscal policy | 8, 12 | Study guide 3.8 |
| 3.9 Automatic stabilizers | 9 | Study guide 3.9 |
How to use your result
- No mistakes in a topic: tick it off; try its practice set later.
- One mistake: read the named section, then redo the question without looking.
- Two or more mistakes, or a guess: work through that topic’s study guide and practice set. Fix multiplier errors (Questions 2, 8, 10, 12) in Topic 3.2 first.
Then try the mixed unit review, which combines topics.