Question 1

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

Accepted Answer

Because as the price level rises, the wealth effect, interest rate effect, and export effect all reduce the quantity of real GDP demanded.

Question 2

Suppose Congress cuts taxes. What is the most likely short-run effect on the aggregate demand curve?

Accepted Answer

The aggregate demand curve will shift to the right.

Question 3

Which of the following events would most likely cause a leftward shift in the short-run aggregate supply curve?

Accepted Answer

A significant increase in oil prices due to an OPEC decision.

Question 4

If the price level rises from 110 to 115 and all other variables remain constant, what happens in the aggregate demand and supply model?

Accepted Answer

There is a movement upward along the aggregate demand curve.

Question 5

Which of the following is a determinant that can shift the aggregate demand curve?

Accepted Answer

A change in consumer confidence.

Question 6

What is the likely effect on the short-run aggregate supply curve if unions become more aggressive and wage rates increase?

Accepted Answer

The short-run aggregate supply curve shifts to the left.

Question 7

Which equation best represents the relationship between real GDP, the price level, and aggregate demand?

Accepted Answer

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

Question 8

During the 2007–2009 recession, which component of aggregate demand showed the largest decline relative to potential GDP?

Accepted Answer

Investment

Question 9

If the economy is experiencing demand-pull inflation, which of the following is most likely occurring?

Accepted Answer

Aggregate demand is increasing so much that equilibrium output exceeds full employment output.

Question 10

Which of the following best describes the long-run aggregate supply curve (LRAS)?

Accepted Answer

It is vertical because, in the long run, output is determined by resources and technology, not the price level.

Question 11

A supply shock, such as a sudden increase in oil prices, will most likely result in which short-run macroeconomic outcome?

Accepted Answer

A recession with higher unemployment and a higher price level.

Question 12

Which of the following is NOT a factor that shifts the short-run aggregate supply curve?

Accepted Answer

A change in consumer confidence

Question 13

According to the monetarist model, what is the recommended policy for increasing the quantity of money?

Accepted Answer

Increase the money supply at a constant rate, regardless of economic conditions.

Question 14

Which of the following best describes stagflation?

Accepted Answer

A combination of inflation and recession, usually resulting from a supply shock.

Question 15

If the expected future price level increases, what is the likely effect on the short-run aggregate supply curve?

Accepted Answer

It will shift to the left.

Question 16

Which of the following is a key insight of the new classical macroeconomic model?

Accepted Answer

Workers and firms have rational expectations.

Question 17

Suppose a giant natural gas discovery decreases energy prices. What is the likely effect on the short-run aggregate supply curve?

Accepted Answer

It will shift to the right.

Question 18

Which of the following best describes the process of automatic adjustment after a recession caused by a decrease in aggregate demand?

Accepted Answer

Wages and prices fall, shifting the short-run aggregate supply curve to the right until the economy returns to potential GDP.

Question 19

Karl Marx’s labor theory of value argued that:

Accepted Answer

All value in goods and services comes from the labor embodied in them.

Question 20

If business expectations become more favorable, what is the likely effect on aggregate demand?

Accepted Answer

Aggregate demand will increase.

Aggregate Demand and Aggregate Supply: Macroeconomic Equilibrium and Policy Implications

Study Guide - Practice Questions