Question 1

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

Accepted Answer

Because higher prices reduce the real value of money, leading to lower consumer spending, lower investment, and lower net exports.

Question 2

Suppose the U.S. price level declines. According to the exchange-rate effect, what happens to net exports (NX)?

Accepted Answer

Net exports increase because the dollar depreciates.

Question 3

Which equation represents the aggregate demand in the economy?

Accepted Answer

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

Question 4

A stock market boom makes households feel wealthier. What is the effect on the AD curve?

Accepted Answer

The AD curve shifts right because consumer spending rises.

Question 5

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

Accepted Answer

An increase in immigration that expands the labor force.

Question 6

Why is the LRAS curve vertical?

Accepted Answer

Because the natural rate of output is determined by labor, capital, natural resources, and technology, not by the price level.

Question 7

According to the sticky-wage theory, what happens when the actual price level ($$P) $$exceeds the expected price level ($$PE$$)?

Accepted Answer

Production becomes more profitable, so firms increase output and employment.

Question 8

Which formula describes the relationship between output and the price level in the short run, according to the three theories of aggregate supply?

Accepted Answer

$$Y = YN + a (P - PE)$$

Question 9

If the expected price level ($$PE) $$rises, what happens to the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts left because production becomes less profitable.

Question 10

During the Great Depression, which of the following occurred as a result of a large contractionary shift in aggregate demand?

Accepted Answer

Real GDP fell, price level fell, and unemployment rose.

Question 11

Suppose oil prices increase sharply. What is the immediate effect on the AD-AS model?

Accepted Answer

SRAS shifts left, leading to lower output and higher prices (stagflation).

Question 12

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

Accepted Answer

Monetary neutrality

Question 13

In the long run, what happens to output and the price level after a negative supply shock if policymakers do nothing?

Accepted Answer

Output returns to its natural level but the price level remains permanently higher.

Question 14

Which of the following best describes the policy response to the Covid-19 recession in the United States?

Accepted Answer

The government and Federal Reserve implemented large fiscal and monetary stimulus, including the CARES Act and near-zero interest rates.

Question 15

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

Accepted Answer

A fall in prices increases the real value of consumers’ wealth.

Question 16

If the U.S. exchange rate falls, what happens to the AD curve?

Accepted Answer

AD curve shifts right because net exports rise.

Question 17

Which of the following is a plausible effect of a government policy that increases investment tax credits?

Accepted Answer

Investment (I) rises, shifting the AD curve right.

Question 18

Which of the following is NOT a determinant of the natural rate of output ($$YN$$)?

Accepted Answer

Money supply

Question 19

According to Keynes, what should policymakers do during recessions and depressions?

Accepted Answer

Shift aggregate demand to address inadequate demand.

Question 20

Which of the following best describes the effect of sticky prices in the short run?

Accepted Answer

Some firms with menu costs keep prices fixed, increasing demand for their products and output when the price level rises.

Aggregate Demand and Aggregate Supply: Economic Fluctuations and the AD-AS Model

Study Guide - Practice Questions