Question 1

Refer to the first image. What does the movement from point A to point B along the AD curve represent?

Accepted Answer

A decrease in the price level leading to an increase in the quantity of real GDP demanded.

Question 2

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

Accepted Answer

Because lower price levels increase real wealth, lower interest rates, and improve net exports.

Question 3

Which effect describes how a lower price level increases the real wealth of households, thereby increasing consumption spending?

Accepted Answer

Wealth effect

Question 4

Suppose the real interest rate in an economy decreases. According to the AD/AS model, what is the likely short-run effect on aggregate demand?

Accepted Answer

Aggregate demand will shift to the right.

Question 5

Refer to the second image. What does the movement from point A to point B along the SRAS curve illustrate?

Accepted Answer

An increase in the price level causing an increase in the quantity of real GDP supplied.

Question 6

Why is the long-run aggregate supply (LRAS) curve vertical, as shown in the third image?

Accepted Answer

Because in the long run, the price level does not affect the economy's maximum sustainable output.

Question 7

Which of the following would cause a rightward shift in the long-run aggregate supply (LRAS) curve?

Accepted Answer

A technological improvement.

Question 8

Refer to the fourth image. What does a shift from SRAS0 to SRAS1 represent?

Accepted Answer

An increase in short-run aggregate supply due to positive supply shock.

Question 9

If the economy is initially in long-run equilibrium and experiences a positive aggregate demand shock, what is the likely short-run outcome?

Accepted Answer

Real GDP will temporarily exceed full-employment level and unemployment will fall below the natural rate.

Question 10

Which of the following is NOT a factor that shifts the long-run aggregate supply (LRAS) curve?

Accepted Answer

A change in the price level.

Question 11

Suppose a country discovers a new natural resource. What is the likely effect on the aggregate supply curves?

Accepted Answer

Both SRAS and LRAS will shift to the right.

Question 12

Which equation correctly represents aggregate demand in terms of its components?

Accepted Answer

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

Question 13

If the price level in an economy unexpectedly rises, but resource prices are sticky, what is the likely short-run effect on firms?

Accepted Answer

Firms will increase production because higher prices improve profitability.

Question 14

Which of the following best describes the concept of 'sticky prices'?

Accepted Answer

Prices that cannot change in the short run due to prior agreements.

Question 15

A temporary decrease in the price of crude oil is most likely to cause which of the following?

Accepted Answer

A rightward shift in the SRAS curve.

Question 16

If the economy is operating at full employment and experiences a negative SRAS shock, what is the likely long-run outcome?

Accepted Answer

Real GDP will eventually return to full-employment level as SRAS returns to its original position.

Question 17

Which of the following statements about long-run equilibrium is correct?

Accepted Answer

Real GDP equals the economy's maximum sustainable output.

Question 18

Which of the following real-world events would most likely cause a leftward shift in the aggregate demand curve?

Accepted Answer

A sharp decline in retail sales due to depleted savings and maxed-out credit.

Question 19

If the University of Michigan’s consumer sentiment index falls sharply, what is the likely effect on the AD/AS model?

Accepted Answer

Aggregate demand will shift to the left.

Question 20

Which of the following best describes the effect of a positive AD shock in the long run?

Accepted Answer

Resource prices eventually rise, causing SRAS to decrease and real GDP to return to full-employment level.

Aggregate Demand and Aggregate Supply: Principles and Applications

Study Guide - Practice Questions