Question 1

Suppose the U.S. economy is in long-run equilibrium. If the Federal Reserve unexpectedly increases interest rates, which of the following best describes the short-run effect on real GDP and the price level, according to the aggregate demand and aggregate supply model?

Accepted Answer

Real GDP decreases and the price level falls due to lower investment.

Question 2

Which of the following equations correctly represents the components of aggregate demand in the U.S. economy?

Accepted Answer

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

Question 3

During the Covid-19 recession, why did D.R. Horton (a home builder) experience increased revenues while AMC (a movie theater chain) suffered losses?

Accepted Answer

Record low interest rates and stimulus checks increased demand for housing, while social distancing rules reduced demand for services like movies.

Question 4

Which of the following best explains the 'wealth effect' as it relates to aggregate demand?

Accepted Answer

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

Question 5

If the price level in the United States rises relative to other countries, what is the likely effect on U.S. net exports and aggregate demand?

Accepted Answer

Net exports will fall, decreasing aggregate demand.

Question 6

Which of the following government actions is an example of fiscal policy that could shift the aggregate demand curve to the right?

Accepted Answer

Congress increases government purchases of infrastructure.

Question 7

Why is the short-run aggregate supply (SRAS) curve upward sloping?

Accepted Answer

Because input prices such as wages and resource costs are 'sticky' and adjust more slowly than output prices.

Question 8

Suppose workers and firms expect the price level to increase in the future. What is the likely effect on the short-run aggregate supply curve?

Accepted Answer

The SRAS curve will shift to the left.

Question 9

Which of the following events would cause a leftward shift of the short-run aggregate supply (SRAS) curve?

Accepted Answer

A sudden increase in the price of natural resources due to a supply shock.

Question 10

In the long-run aggregate supply (LRAS) model, which of the following factors does NOT affect the position of the LRAS curve?

Accepted Answer

The price level.

Question 11

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

Accepted Answer

The LRAS curve will shift to the left.

Question 12

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 level.

Question 13

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

Stagflation: higher inflation and higher unemployment.

Question 14

Which of the following is a reason why wages are considered 'sticky' in the short run?

Accepted Answer

Salary reviews typically occur only once a year, and firms dislike cutting wages.

Question 15

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

Accepted Answer

Net exports decrease, shifting aggregate demand to the left.

Question 16

Which of the following best describes the effect of an increase in government purchases on the aggregate demand curve, ceteris paribus?

Accepted Answer

It shifts the aggregate demand curve to the right.

Question 17

Which of the following is NOT a reason why the short-run aggregate supply curve is upward sloping?

Accepted Answer

All firms and workers perfectly predict future price levels.

Question 18

Suppose the economy experiences a negative demand shock. In the long run, what is the likely adjustment process if no policy intervention occurs?

Accepted Answer

SRAS shifts right as wages and input prices fall, restoring full employment at a lower price level.

Question 19

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

Accepted Answer

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

Question 20

Which of the following best describes potential GDP?

Accepted Answer

The level of real GDP in the long run when the economy is at full employment.

Aggregate Demand and Aggregate Supply: Principles and Applications

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