Question 1

Which of the following best explains why the aggregate demand curve is downward sloping?

Accepted Answer

Because higher price levels reduce the purchasing power of savings, increase interest rates, and make domestic goods less competitive internationally.

Question 2

Suppose the marginal propensity to consume (MPC) is 0.8. If the government increases spending by $50 million, what is the total change in aggregate demand, assuming no crowding out?

Accepted Answer

$250 million

Question 3

Which of the following would cause a rightward shift in the aggregate demand curve?

Accepted Answer

An increase in government spending

Question 4

In the short run, an increase in aggregate demand will most likely result in:

Accepted Answer

An increase in the price level and an increase in real output

Question 5

If the short-run aggregate supply curve shifts leftward due to a supply shock, what is the most likely outcome?

Accepted Answer

Higher price level and lower real output

Question 6

Which of the following is NOT a determinant of aggregate demand?

Accepted Answer

Productivity

Question 7

The long-run aggregate supply curve is vertical because:

Accepted Answer

In the long run, changes in the price level do not affect real output.

Question 8

If the marginal propensity to save (MPS) is 0.2, what is the value of the spending multiplier?

Accepted Answer

$$1/0.2 = 5$$

Question 9

Which of the following scenarios best illustrates cost-push inflation?

Accepted Answer

A sudden increase in oil prices raises production costs for many firms.

Question 10

According to the Phillips Curve, in the short run, there is:

Accepted Answer

An inverse relationship between inflation and unemployment.

Question 11

If the economy is experiencing a recessionary gap, which of the following policies would help restore full employment?

Accepted Answer

Increase aggregate demand through expansionary fiscal or monetary policy

Question 12

Which of the following best describes the effect of an increase in productivity on the aggregate supply curve?

Accepted Answer

It shifts the aggregate supply curve to the right.

Question 13

If the marginal propensity to consume (MPC) is 0.6, what is the value of the spending multiplier?

Accepted Answer

$$1/(1-0.6) = 2.5$$

Question 14

Which of the following would NOT shift the short-run aggregate supply curve?

Accepted Answer

A change in consumer expectations

Question 15

Stagflation is best described as:

Accepted Answer

A period of high inflation and high unemployment

Question 16

If the government responds to cost-push inflation by increasing aggregate demand, what is the likely result?

Accepted Answer

The price level will rise even more.

Question 17

Which of the following is true about the long-run Phillips Curve?

Accepted Answer

It is vertical at the natural rate of unemployment.

Question 18

A decrease in net export spending due to a stronger domestic currency will:

Accepted Answer

Shift the aggregate demand curve to the left.

Question 19

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

Accepted Answer

Because input prices are fixed while output prices can change.

Question 20

If the economy is at long-run equilibrium, which of the following is true?

Accepted Answer

The economy is producing at its full-employment output.

Aggregate Demand and Aggregate Supply Model: Comprehensive Study Notes

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