This diagnostic helps you find which Unit 6 topics to revisit. It has one or two short questions on each topic, 6.1 to 6.6. 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 (currency the valda, VD) and Kestria (currency the kesta, KS) are fictional countries, and all data are fictional. Exchange rates are flexible and written as kestas per valda unless a question says otherwise. A four-function calculator is enough. Only the stated change happens in each question.
Question 1 (multiple choice · 6.1)
Which transaction is a debit in Valdoria’s capital and financial account (CFA)?
- (A) A Valdorian carmaker builds a new assembly plant in Kestria.
- (B) A Valdorian carmaker receives profits from its plant in Kestria.
- (C) Kestrian tourists pay for ski lessons in Valdoria.
- (D) A Kestrian fund buys bonds issued by Valdoria’s government.
Answer and explanation
Answer: (A). Building a plant abroad is buying a foreign real asset. Money leaves Valdoria: a CFA debit (outflow).
- (B) Profits earned on an asset abroad are income: a current account credit.
- (C) Ski lessons sold to foreigners are a service export: a current account credit.
- (D) is in the CFA, but money flows into Valdoria, so it is a credit.
If you missed this: read “The capital and financial account (CFA)” and Worked example 2 in the Topic 6.1 study guide.
Question 2 (multiple choice · 6.1)
In one year Valdoria has net exports of +12, net income from abroad of −20 and net unilateral transfers of −7 (VD bn). Assuming every transaction is recorded, what is Valdoria’s CFA balance?
- (A) −15, a net financial capital outflow
- (B) −12, a net financial capital outflow
- (C) +15, a net financial capital inflow
- (D) +39, a net financial capital inflow
Answer and explanation
Answer: (C). CA = 12 − 20 − 7 = −15. Because CA + CFA = 0, CFA = +15, a net inflow.
- (A) gives the CFA the same sign as the CA. Two deficits cannot sum to zero.
- (B) balances the CFA against the trade balance only, ignoring income and transfers.
- (D) adds the sizes of all three items and ignores their signs.
If you missed this: read “Why CA + CFA = 0” in the Topic 6.1 study guide.
Question 3 (multiple choice · 6.2)
Valdoria’s central bank quotes the price of one kesta in valdas. Over a month it moves from VD 0.50 to VD 0.45. Which statement is correct?
- (A) The valda depreciated, because the quoted rate fell.
- (B) The kesta depreciated by 10% and the valda appreciated by 11.11%.
- (C) The kesta depreciated by 10% and the valda appreciated by 10%.
- (D) The kesta appreciated by 11.11% and the valda depreciated by 10%.
Answer and explanation
Answer: (B). A kesta now buys fewer valdas: (0.45 − 0.50) ÷ 0.50 × 100 = −10%. One valda was worth 1 ÷ 0.50 = KS 2.0000 and is now worth 1 ÷ 0.45 = KS 2.2222, a rise of 11.11%.
- (A) The quote is the price of a kesta. A fall in it is a kesta depreciation, so the valda appreciated.
- (C) flips the sign instead of using the valda’s own price. Each percentage has a different base.
- (D) reverses both directions.
If you missed this: read “Two ways to quote the same rate” and Worked example 3 in the Topic 6.2 study guide.
Question 4 (multiple choice · 6.3)
Think about the market for kestas. Which transaction adds to the supply of kestas?
- (A) A Valdorian family pays for a holiday in Kestria.
- (B) A Valdorian bank buys Kestrian government bonds.
- (C) A Valdorian importer pays for Kestrian tea.
- (D) A Kestrian hospital buys scanners made in Valdoria.
Answer and explanation
Answer: (D). The hospital must pay in valdas, so it offers kestas to get them. Supplying kestas is the same trade as demanding valdas.
- (A), (B) and (C) are Valdorians paying for things priced in kestas, so each one demands kestas.
If you missed this: read “Who supplies valdas?” and “Two markets, one set of trades” in the Topic 6.3 study guide.
Question 5 (multiple choice · 6.4)
Kestria places a high tariff on goods imported from Valdoria. What happens in the market for valdas?
- (A) Supply of valdas decreases, and the valda appreciates.
- (B) Demand for valdas decreases, and the valda depreciates.
- (C) Demand for valdas increases, and the valda appreciates.
- (D) Supply of valdas increases, and the valda depreciates.
Answer and explanation
Answer: (B). Valdorian goods now cost Kestrians more, so they buy fewer and need fewer valdas. Demand for valdas shifts left.
- (A) is the result if Valdoria taxed Kestrian goods.
- (C) gets both the shift and the direction wrong.
- (D) gets the valda right but shifts the wrong curve: the tariff changes what Kestrians buy.
If you missed this: read “What shifts the demand for a currency” and contrast the trade barriers point (a supply shifter) in the Topic 6.4 study guide.
Question 6 (multiple choice · 6.5)
Valdoria is at full employment. The valda then appreciates against the kesta. Other things equal, what happens in Valdoria in the short run?
- (A) AD shifts right, because imports are cheaper and Valdorians buy more.
- (B) Net exports rise, because a stronger currency helps exporters.
- (C) The price level falls, so the economy moves down along an unchanged AD curve and real GDP rises.
- (D) AD shifts left, real GDP falls and unemployment rises.
Answer and explanation
Answer: (D). Valdorian goods cost Kestrians more (exports fall) and Kestrian goods cost Valdorians less (imports rise). Net exports fall, so AD shifts left: output and the price level fall; unemployment rises.
- (A) Imports are subtracted in AD = C + I + G + NX, so more imports lower AD.
- (B) A stronger currency makes exports dearer abroad.
- (C) The exchange rate changed for a reason other than the price level, so the whole AD curve shifts.
If you missed this: read “From net exports to aggregate demand” in the Topic 6.5 study guide.
Question 7 (multiple choice · 6.6)
Valdorian bonds pay 6% with expected inflation of 3%. Kestrian bonds pay 7%. Expected inflation in Kestria rises from 3% to 5%, and no nominal rate changes. What happens?
- (A) Funds keep flowing to Kestria, because its nominal rate is still higher, and the valda depreciates.
- (B) Kestria’s real interest rate rises to 12%, so more funds flow to Kestria.
- (C) Funds that were flowing to Kestria now flow to Valdoria, and the valda appreciates.
- (D) Funds now flow to Valdoria, and the valda depreciates.
Answer and explanation
Answer: (C). Valdoria’s real rate is 6 − 3 = 3%. Kestria’s falls from 7 − 3 = 4% to 7 − 5 = 2%. Funds move to the higher real rate. Kestrians need valdas to buy Valdorian assets, so the valda appreciates.
- (A) compares nominal rates.
- (B) adds expected inflation instead of subtracting it.
- (D) gets the flow right but the currency wrong: an inflow raises demand for valdas.
If you missed this: read Worked example 1 in the Topic 6.6 study guide.
Question 8 (multiple choice · 6.6)
Kestrian savers buy many more Valdorian bonds. Which pair of effects is correct for Valdoria?
- (A) The supply of loanable funds increases, and the CFA moves towards surplus.
- (B) The demand for loanable funds increases, and the CFA moves towards surplus.
- (C) The supply of loanable funds increases, and the current account moves towards surplus.
- (D) The supply of loanable funds decreases, and the CFA moves towards deficit.
Answer and explanation
Answer: (A). The inflow is extra saving lent in Valdoria, so supply of loanable funds shifts right. Foreign purchases of Valdorian assets are CFA credits.
- (B) shifts the wrong curve. Borrowers’ plans did not change.
- (C) Because CA + CFA = 0, a CFA moving towards surplus means the CA moves towards deficit.
- (D) describes the country that loses the funds.
If you missed this: read steps 4 and 6 of “The chain across three markets” in the Topic 6.6 study guide.
Question 9 (short answer · 6.2)
A Valdorian piano costs VD 2,400 and a Kestrian scooter costs KS 9,000; neither price changes at home. The rate moves from 1 VD = 3.6 KS to 1 VD = 3.0 KS.
(a) State which currency appreciated. (b) Calculate the percentage change in the value of each currency. (c) Calculate the piano’s price in kestas and the scooter’s price in valdas, before and after.
Worked answer
(a) One valda now buys fewer kestas, so the kesta appreciated and the valda depreciated.
(b) Valda: (3.0 − 3.6) ÷ 3.6 × 100 = −16.67%. Kesta: from 1 ÷ 3.6 = VD 0.2778 to 1 ÷ 3.0 = VD 0.3333, which is 3.6 ÷ 3.0 = 1.2, so +20%.
(c) Piano: 2,400 × 3.6 = KS 8,640 before; 2,400 × 3.0 = KS 7,200 after. Scooter: 9,000 ÷ 3.6 = VD 2,500 before; 9,000 ÷ 3.0 = VD 3,000 after.
If you missed this: read Worked examples 1 and 2 in the Topic 6.2 study guide.
Question 10 (short answer · 6.4)
In the market for valdas, Qd = 180 − 50e and Qs = −40 + 60e, where e is in KS per valda and quantities are millions of valdas a month.
(a) Find the equilibrium exchange rate and quantity. (b) Valdoria’s central bank lowers interest rates. Foreign savers now want 33 million fewer valdas a month at every rate. Find the new equilibrium. (c) Find the surplus or shortage at the old rate, and explain how the market reaches the new equilibrium.
Worked answer
(a) 180 − 50e = −40 + 60e, so 220 = 110e and e = KS 2.0. Q = 180 − 100 = 80 million valdas.
(b) New demand: Qd = 147 − 50e. Then 187 = 110e, so e = KS 1.7 and Q = 147 − 85 = 62 million valdas.
(c) At KS 2.0 the new Qd = 47 and Qs = 80: a surplus of 33 million valdas. Sellers of valdas bid the rate down until the surplus disappears at KS 1.7: the valda depreciates.
If you missed this: read “Monetary policy and the exchange rate” and Worked example 1 in the Topic 6.4 study guide.
Question 11 (short answer · 6.5)
After the valda appreciates, Valdoria’s exports fall from VD 320 bn to VD 303 bn and its imports rise from VD 290 bn to VD 299 bn. The MPC is 0.6.
(a) Calculate net exports before and after, and the change. (b) Calculate the shift in AD at each price level. (c) State the short-run effects on real GDP, unemployment and the price level.
Worked answer
(a) Before: 320 − 290 = +30. After: 303 − 299 = +4. Change: −VD 26 bn.
(b) Multiplier = 1 ÷ (1 − 0.6) = 2.5. AD shifts left by 26 × 2.5 = VD 65 bn.
(c) Along the SRAS curve, real GDP falls (by less than VD 65 bn, as the price level also falls), unemployment rises and the price level falls.
If you missed this: read Worked examples 1 and 2 in the Topic 6.5 study guide.
Your next step
Circle each question you got wrong or guessed.
| Topic | Question(s) | If you missed it, read |
|---|---|---|
| 6.1 Balance of payments accounts | 1, 2 | Topic 6.1 study guide |
| 6.2 Exchange rates | 3, 9 | Topic 6.2 study guide |
| 6.3 The foreign exchange market | 4 | Topic 6.3 study guide |
| 6.4 Effect of changes in policies and economic conditions | 5, 10 | Topic 6.4 study guide |
| 6.5 Changes in the foreign exchange market and net exports | 6, 11 | Topic 6.5 study guide |
| 6.6 Real interest rates and international capital flows | 7, 8 | Topic 6.6 study guide |
How to use your result
- No mistakes in a topic: tick it off.
- 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 first.
- Mistakes on “which curve” (Questions 4, 5, 8): say who is paying whom before you shift anything.
Then try the mixed unit review, whose questions combine several topics.