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 unemployment and downward pressure on prices.

Question 2

According to the AD-AS model, which of the following events would most likely shift the Aggregate Demand (AD) curve to the right?

Accepted Answer

An increase in household expectations of future income.

Question 3

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

Accepted Answer

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

Question 4

Suppose the Canadian dollar appreciates significantly. What is the most likely effect on the AD curve?

Accepted Answer

The AD curve will shift to the left due to decreased net exports.

Question 5

Which of the following fiscal policies would be most effective in closing a recessionary gap, as shown in Figure 9-7 (right panel)?

Accepted Answer

Decreasing taxes and increasing government spending.

Question 6

What is the primary mechanism by which a recessionary gap is closed in the long run without government intervention, as shown in Figure 9-7 (left panel)?

Accepted Answer

Falling wages and other factor prices shift the SRAS curve to the right.

Question 7

Which of the following best describes an inflationary gap?

Accepted Answer

Actual real GDP exceeds potential GDP, causing upward pressure on prices.

Question 8

In the context of Figure 9-8 (right panel), which policy would close an inflationary gap?

Accepted Answer

Contractionary fiscal policy, such as increasing taxes or reducing government spending.

Question 9

If a supply shock, such as a sudden increase in oil prices, occurs, what is the likely short-run effect on the economy?

Accepted Answer

The SRAS curve shifts to the left, decreasing real GDP and increasing the price level.

Question 10

Which of the following is an example of an automatic fiscal stabilizer?

Accepted Answer

Progressive income taxes that reduce disposable income as earnings rise.

Question 11

Suppose the government implements a discretionary fiscal policy to close a recessionary gap. Which of the following equations best represents the effect on aggregate demand?

Accepted Answer

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

Question 12

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

Accepted Answer

Because higher prices reduce the purchasing power of money, leading to less consumption, investment, and net exports.

Question 13

If the economy is experiencing an inflationary gap, what is the likely long-run adjustment if no policy action is taken?

Accepted Answer

SRAS shifts to the left as wages and input prices rise, restoring equilibrium at a higher price level.

Question 14

Which of the following is a likely effect of an increase in immigration on the aggregate supply curve?

Accepted Answer

The SRAS curve shifts to the right due to an increase in the labor force.

Question 15

Which of the following best describes the Phillips Curve relationship?

Accepted Answer

A tradeoff between the unemployment rate and the inflation rate.

Question 16

If workers and firms expect higher future prices, what is the likely effect on the SRAS curve?

Accepted Answer

SRAS shifts to the left as costs rise.

Question 17

Which of the following scenarios would most likely cause a movement along the AD curve rather than a shift?

Accepted Answer

A change in the price level.

Question 18

Suppose the government wants to promote long-term economic growth. Which policy would be most effective?

Accepted Answer

Increasing investment in technology and education.

Question 19

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

Accepted Answer

An increase in saving can reduce consumption and GDP in the short run, but increase investment and GDP in the long run.

Aggregate Demand and Supply: Gaps, Adjustments, and Fiscal Policy

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