Question 1

Which of the following best describes a recessionary gap in the context of the Aggregate Demand and Aggregate Supply (AD-AS) model?

Accepted Answer

It occurs when actual real GDP is less than potential GDP, resulting in downward pressure on prices and unemployment above the natural rate.

Question 2

Suppose the government implements expansionary fiscal policy to close a recessionary gap. Which of the following best describes the effect on the AD-AS model?

Accepted Answer

The Aggregate Demand curve shifts to the right, increasing real GDP and the price level.

Question 3

Which of the following is a key reason why the Aggregate Demand (AD) curve is downward sloping?

Accepted Answer

As the price level falls, the real value of household wealth increases, leading to higher consumption (wealth effect).

Question 4

A supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

A leftward shift of the SRAS curve, decreasing real GDP and increasing the price level (stagflation).

Question 5

Which of the following equations correctly represents the relationship between Aggregate Demand and its components?

Accepted Answer

$$AD = C + I + G + NX$$

Question 6

If workers and firms expect higher future prices, what is the likely effect on the Short-Run Aggregate Supply (SRAS) curve?

Accepted Answer

SRAS shifts to the left as firms and workers demand higher wages and prices.

Question 7

Which of the following best describes an automatic fiscal stabilizer?

Accepted Answer

A policy tool that automatically increases government spending or decreases taxes as GDP falls, such as progressive income taxes or unemployment insurance.

Question 8

In the long run, after a negative demand shock, what adjustment brings the economy back to potential GDP?

Accepted Answer

SRAS shifts to the right as wages and input prices fall.

Question 9

Which of the following scenarios would shift the Aggregate Demand curve to the right?

Accepted Answer

An increase in household expectations of future income.

Question 10

Suppose the economy is experiencing an inflationary gap. Which fiscal policy would be most appropriate to close the gap?

Accepted Answer

Decrease government spending and/or increase taxes.

Question 11

Which of the following best explains why the Short-Run Aggregate Supply (SRAS) curve is upward sloping?

Accepted Answer

Because contracts, menu costs, and slow wage adjustments make some prices and wages 'sticky' in the short run.

Question 12

If the Canadian dollar appreciates relative to other currencies, what is the likely effect on Aggregate Demand?

Accepted Answer

Aggregate Demand shifts to the left due to decreased net exports.

Question 13

Which of the following is an example of discretionary fiscal policy?

Accepted Answer

A government stimulus package passed in response to a recession.

Question 14

In the context of the Phillips Curve, what is the typical short-run tradeoff?

Accepted Answer

Between unemployment and inflation.

Question 15

If the economy is at point B in Figure 9.7b after a supply shock, what is the long-run adjustment process?

Accepted Answer

SRAS shifts back to the right as wages and prices fall, returning the economy to potential GDP.

Question 16

Which of the following best describes the 'saving paradox' in macroeconomics?

Accepted Answer

Higher saving reduces consumption and GDP in the short run, but increases investment and GDP in the long run.

Question 17

Which of the following would cause a rightward shift in the Long-Run Aggregate Supply (LRAS) curve?

Accepted Answer

An improvement in technology.

Question 18

Suppose the government wants to close a recessionary gap using fiscal policy. Which equation represents the government spending multiplier?

Accepted Answer

$$Multiplier = \frac{1}{1 - MPC}$$

Question 19

Which of the following best describes the adjustment process when the economy is experiencing an inflationary gap?

Accepted Answer

SRAS shifts to the left as wages and input prices rise, reducing real GDP back to potential.

Macroeconomic Equilibrium, Gaps, and Fiscal Policy: Aggregate Demand and Supply Analysis

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