Question 1

Which of the following best describes the Classical Dichotomy in macroeconomics?

Accepted Answer

It is the separation of real and nominal variables, where changes in the money supply only affect nominal variables and not real variables.

Question 2

According to the Quantity Equation $$MV = PY$$, if the velocity of money ($$V) $$and output ($$Y) $$are constant, what happens if the central bank doubles the money supply ($$M$$)?

Accepted Answer

The price level ($$P) $$will double.

Question 3

Which of the following is NOT a reason why the Short-Run Aggregate Demand (SRAD) curve slopes downward?

Accepted Answer

Sticky Wage Effect

Question 4

Suppose a new technology increases labor productivity in an economy. What is the likely effect on the Aggregate Demand (AD) curve?

Accepted Answer

The AD curve shifts to the right.

Question 5

Which of the following events would cause a leftward shift in the Long-Run Aggregate Supply (LRAS) curve?

Accepted Answer

A major earthquake destroys a significant portion of the capital stock.

Question 6

In the short run, why does the Aggregate Supply (SRAS) curve slope upward?

Accepted Answer

Because actual inflation can differ from expected inflation, leading to changes in output supplied.

Question 7

If the economy is experiencing a recessionary gap, which of the following is true?

Accepted Answer

$$Y \u003c Y^*$$, \, (Y - Y^*) \u003c 0$

Question 8

Which of the following best describes the effect of an adverse supply shock, such as a sudden increase in oil prices?

Accepted Answer

The SRAS curve shifts left, causing higher inflation and lower output (stagflation).

Question 9

Which of the following policies would most directly address a recession caused by deficient aggregate demand?

Accepted Answer

Increase government spending or cut taxes to shift AD right.

Question 10

If policymakers respond to stagflation by stimulating aggregate demand, what is the likely outcome?

Accepted Answer

Output returns to potential, but inflation rises further.

Question 11

Which of the following equations best represents the relationship between output supplied, natural output, and price expectations in the short run?

Accepted Answer

$$Quantity\,of\,Output\,Supplied = Natural\,Level\,of\,Output + a(Actual\,Price\,Level - Expected\,Price\,Level)$$

Question 12

Which of the following would NOT shift the Short-Run Aggregate Supply (SRAS) curve?

Accepted Answer

A change in the current price level.

Question 13

If the central bank rapidly increases the money supply in the long run, what is the most likely outcome according to the classical dichotomy?

Accepted Answer

A high rate of inflation.

Question 14

Which of the following is an example of a positive shock to Long-Run Aggregate Supply (LRAS)?

Accepted Answer

Discovery of a new mineral deposit.

Question 15

In the long-run equilibrium, which of the following conditions must hold?

Accepted Answer

$$AD = SRAS = LRAS$$

Question 16

Which of the following best explains the Wealth Effect as it relates to the Aggregate Demand curve?

Accepted Answer

A fall in the price level increases the real value of money, making consumers feel wealthier and increasing demand for goods and services.

Question 17

Which of the following is a plausible consequence of a negative shock to potential output (LRAS), such as a war or genocide?

Accepted Answer

A fall in potential output, leading to an expansionary gap and higher inflation.

Question 18

Which of the following is NOT a reason for the upward slope of the Short-Run Aggregate Supply (SRAS) curve?

Accepted Answer

Wealth Effect

Question 19

If actual inflation is less than expected inflation, what is the likely relationship between output and potential output?

Accepted Answer

$$Y \u003c Y^*$$

Question 20

Which of the following best describes stagflation?

Accepted Answer

A combination of inflation and stagnation (falling output).

Aggregate Demand and Aggregate Supply: Macroeconomic Fluctuations and Equilibrium

Study Guide - Practice Questions

Study Guide - Flashcards