Question 1

Suppose the U.S. economy experiences a sharp increase in oil prices due to geopolitical tensions. According to the aggregate demand and aggregate supply model, what is the most likely short-run effect on the economy?

Accepted Answer

The short-run aggregate supply (SRAS) curve shifts to the left, decreasing real GDP and increasing the price level (stagflation).

Question 2

Which of the following best explains why the short-run aggregate supply (SRAS) curve is upward sloping?

Accepted Answer

Because as the price level rises, input prices such as wages and raw materials rise more slowly due to contracts and menu costs.

Question 3

If the Federal Reserve increases interest rates, what is the most likely effect on aggregate demand?

Accepted Answer

Aggregate demand will shift to the left because higher interest rates reduce consumption and investment.

Question 4

Which equation correctly represents the components of real GDP in the aggregate demand model?

Accepted Answer

$$Y = C + I + G + NX$$

Question 5

During the Covid-19 recession, which component of aggregate demand increased, contrary to typical recessions?

Accepted Answer

Residential investment

Question 6

Which of the following is NOT a reason why wages and prices are considered 'sticky' in the short run?

Accepted Answer

All firms and workers instantly adjust their expectations to new price levels.

Question 7

Suppose the government increases its purchases of goods and services. What is the immediate effect on the aggregate demand curve, holding all else constant?

Accepted Answer

It shifts to the right.

Question 8

If workers and firms expect the price level to rise in the future, what will happen to the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS will shift to the left.

Question 9

Which of the following scenarios would cause a movement along the aggregate demand curve, rather than a shift of the curve?

Accepted Answer

A decrease in the price level, holding all other factors constant.

Question 10

Which of the following best describes the 'wealth effect' in the context of aggregate demand?

Accepted Answer

When the price level falls, the real value of household wealth rises, leading to higher consumption.

Question 11

If the U.S. dollar appreciates relative to other currencies, what is the likely effect on U.S. net exports and aggregate demand?

Accepted Answer

Net exports decrease and aggregate demand shifts left.

Question 12

Which of the following would shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

A technological advancement that increases productivity.

Question 13

In the long-run aggregate supply (LRAS) model, what determines the level of potential GDP?

Accepted Answer

The number of workers, the level of technology, and the capital stock.

Question 14

Which of the following is an example of a supply shock?

Accepted Answer

A sudden increase in the price of a key input like oil.

Question 15

Suppose the economy is in long-run equilibrium. If aggregate demand suddenly increases, what is the sequence of events in the short run and long run?

Accepted Answer

Short run: Real GDP falls below potential; Long run: SRAS shifts left, restoring equilibrium at a higher price level.

Question 16

Which of the following policies would be considered expansionary fiscal policy?

Accepted Answer

An increase in government purchases.

Question 17

If stricter immigration laws reduce the number of workers in the U.S., what is the likely effect on the long-run aggregate supply (LRAS) curve?

Accepted Answer

The LRAS curve shifts to the left.

Question 18

Which of the following best describes long-run macroeconomic equilibrium?

Accepted Answer

When the aggregate demand and short-run aggregate supply curves intersect at the long-run aggregate supply curve.

Question 19

Which of the following would cause the short-run aggregate supply (SRAS) curve to shift to the right?

Accepted Answer

An improvement in technology.

Question 20

If the price level decreases but all other factors remain constant, what happens to the quantity of real GDP supplied in the long run?

Accepted Answer

It remains unchanged.

Aggregate Demand and Aggregate Supply: Principles and Applications

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