Question 1

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

Accepted Answer

Because as the price level rises, the real value of money holdings falls, leading to lower consumption, higher interest rates, and reduced net exports.

Question 2

Suppose the government increases its purchases of goods and services. Which of the following will occur in the aggregate demand and aggregate supply model, holding everything else constant?

Accepted Answer

The AD curve will shift to the right.

Question 3

Which of the following events would cause a movement along the aggregate demand curve rather than a shift of the curve?

Accepted Answer

A decrease in the price level due to lower oil prices.

Question 4

If the economy is initially in long-run equilibrium and there is a sudden increase in oil prices (a negative supply shock), what is the most likely short-run outcome?

Accepted Answer

Real GDP falls and the price level rises.

Question 5

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

Accepted Answer

In the short run, the price level has no effect on the quantity of goods and services supplied.

Question 6

Which of the following would shift the short-run aggregate supply (SRAS) curve to the right?

Accepted Answer

A decrease in the price of an important natural resource.

Question 7

Suppose the economy is in short-run equilibrium below potential GDP due to a decrease in aggregate demand. According to the model, what is most likely to happen in the long run if the government does not intervene?

Accepted Answer

The SRAS curve will shift to the right as wages and input prices fall, restoring full employment.

Question 8

Which of the following equations correctly represents the relationship between aggregate demand and its components?

Accepted Answer

$AD = C + I + G + NX$

Question 9

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

Accepted Answer

Net exports decrease and aggregate demand shifts left.

Question 10

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

Accepted Answer

It is vertical because potential GDP is determined by resources, technology, and capital, not the price level.

Question 11

During the 2020 recession, which component of aggregate demand increased, contrary to the overall decline in GDP?

Accepted Answer

Residential investment

Question 12

Suppose the Federal Reserve increases interest rates. What is the most likely effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the left due to decreased consumption and investment.

Question 13

If workers and firms expect higher future prices, what is the likely effect on the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts to the left.

Question 14

Which of the following is an example of a supply shock?

Accepted Answer

A sudden increase in oil prices.

Question 15

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

Accepted Answer

Aggregate demand increases more rapidly than long-run aggregate supply.

Question 16

Suppose the economy is initially at long-run equilibrium. If firms become more optimistic about future profitability and increase investment, what is the likely sequence of events in the short run and long run?

Accepted Answer

AD shifts right, unemployment falls below the natural rate, wages and prices rise, and SRAS shifts left to restore long-run equilibrium at a higher price level.

Question 17

Which of the following would NOT shift the aggregate demand curve?

Accepted Answer

A change in the price level.

Question 18

If a negative supply shock causes stagflation, what combination of outcomes is most likely in the short run?

Accepted Answer

Higher unemployment and higher inflation.

Question 19

Which of the following best describes the effect of an increase in the labor force or capital stock on the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts to the right because more output can be produced at every price level.

Question 20

Suppose the economy experiences both a negative supply shock and a decrease in aggregate demand, as during the COVID-19 pandemic. What is the likely effect on equilibrium output and the price level?

Accepted Answer

Output falls and the price level may rise or fall depending on the relative size of the shifts.

Aggregate Demand and Aggregate Supply: Macroeconomic Equilibrium and Dynamics

Study Guide - Practice Questions

Study Guide - Flashcards