Question 1

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

Accepted Answer

An increase in the price level raises the interest rate and reduces investment spending.

Question 2

Suppose the U.S. price level rises. According to the international-trade effect, what happens to U.S. net exports?

Accepted Answer

Net exports decrease because U.S. exports become more expensive and imports become cheaper.

Question 3

Which equation correctly represents the components of aggregate demand?

Accepted Answer

$Y = C + I + G + NX$

Question 4

If the Federal Reserve increases interest rates, what is the expected effect on the aggregate demand curve?

Accepted Answer

The aggregate demand curve shifts to the left.

Question 5

During the Covid-19 recession, which component of aggregate demand increased due to record low interest rates and stimulus checks?

Accepted Answer

Residential construction (Investment)

Question 6

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

Accepted Answer

An increase in input prices due to a supply shock

Question 7

What is the effect of a decrease in personal income taxes on aggregate demand?

Accepted Answer

Aggregate demand shifts to the right due to increased consumption.

Question 8

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

Accepted Answer

Firms and workers are always able to perfectly predict changes in the price level.

Question 9

If stricter immigration laws are imposed and many workers leave the United States, what happens to the long-run aggregate supply (LRAS) curve?

Accepted Answer

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

Question 10

Which of the following best describes the 'wealth effect'?

Accepted Answer

When the price level falls, the real value of household wealth increases, leading to higher consumption.

Question 11

Suppose the value of the U.S. dollar rises relative to the Swedish krona. What is the expected effect on U.S. exports and aggregate demand?

Accepted Answer

U.S. exports decrease and aggregate demand decreases.

Question 12

Which of the following is NOT a component of aggregate demand?

Accepted Answer

Wages (W)

Question 13

In the long run, the level of aggregate supply is determined by:

Accepted Answer

The number of workers, the level of technology, and the capital stock.

Question 14

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

Accepted Answer

A change in the price level, holding all else constant.

Question 15

If firms and workers expect higher prices in the future, what happens to the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts to the left.

Question 16

Which of the following is true about the long-run aggregate supply (LRAS) curve?

Accepted Answer

It is vertical because potential GDP does not depend on the price level.

Question 17

Suppose a negative supply shock suddenly increases input prices. What is the most likely short-run macroeconomic outcome?

Accepted Answer

Stagflation: a combination of inflation and recession.

Question 18

If the government increases its purchases, which of the following best describes the effect on aggregate demand?

Accepted Answer

Aggregate demand shifts to the right.

Question 19

Which of the following is a multi-step effect of a decrease in interest rates on the macroeconomy?

Accepted Answer

Planned investment increases, shifting AD right, raising real GDP and lowering unemployment in the short run.

Question 20

Which of the following is most likely to shift the short-run aggregate supply curve to the right?

Accepted Answer

A technological improvement that increases productivity.

Aggregate Demand and Aggregate Supply: Principles and Applications

Study Guide - Practice Questions