Question 1

Which of the following best explains why the aggregate demand (AD) curve slopes downward?

Accepted Answer

Because as the price level rises, the real value of household wealth declines, interest rates rise, and net exports fall.

Question 2

Suppose the Federal Reserve increases interest rates. Which of the following is the most likely short-run effect on the aggregate demand curve?

Accepted Answer

The AD curve shifts to the left because investment spending decreases.

Question 3

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

Accepted Answer

Net exports decrease and the AD curve shifts to the left.

Question 4

Which of the following 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 else constant.

Question 5

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

Accepted Answer

The capital stock increases as the price level rises.

Question 6

Suppose firms and workers expect the price level to rise by 5% next year. What is the likely effect on the SRAS curve?

Accepted Answer

SRAS shifts to the left.

Question 7

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

Accepted Answer

An increase in the capital stock.

Question 8

During the 2020 recession, which component of aggregate demand increased, contrary to typical recessions?

Accepted Answer

Residential investment.

Question 9

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

SRAS shifts to the left, decreasing output and increasing prices.

Question 10

In the dynamic aggregate demand and aggregate supply model, what is the usual cause of inflation?

Accepted Answer

Total spending increases faster than production.

Question 11

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

Accepted Answer

The intersection of the AD and SRAS curves at the LRAS level of real GDP.

Question 12

If the government increases personal income taxes, what is the likely effect on the aggregate demand curve?

Accepted Answer

AD shifts to the left because disposable income decreases.

Question 13

Which school of thought argues that most fluctuations in real output are caused by changes in the money supply and advocates a constant monetary growth rule?

Accepted Answer

Monetarist school.

Question 14

According to the real business cycle model, what is the main source of fluctuations in real GDP?

Accepted Answer

Temporary productivity shocks.

Question 15

Which of the following is a plausible real-world example of a supply shock?

Accepted Answer

A sudden increase in oil prices due to geopolitical conflict.

Question 16

If the economy is in a recession caused by a decrease in aggregate demand, what is the likely long-run adjustment if no policy action is taken?

Accepted Answer

SRAS shifts to the right, restoring full employment at a lower price level.

Question 17

Which of the following best describes the Austrian school’s view of the business cycle?

Accepted Answer

Business cycles are caused by central bank-induced low interest rates leading to overinvestment.

Question 18

Suppose the government increases its purchases of goods and services. Which equation correctly shows the effect on aggregate demand?

Accepted Answer

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

Question 19

If the price level increases, which of the following is most likely to occur according to the interest-rate effect?

Accepted Answer

Households and firms borrow more, causing interest rates to rise and investment to fall.

Question 20

Which of the following is a key difference between the Keynesian and New Classical schools of thought?

Accepted Answer

Keynesians emphasize sticky wages and prices, while New Classical economists emphasize rational expectations.

Aggregate Demand and Aggregate Supply Analysis: Macroeconomics Study Guide

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