Question 1

Which of the following best explains why residential construction increased during the Covid-19 recession while services declined?

Accepted Answer

Residential construction is less affected by social distancing rules and benefited from low interest rates and stimulus checks.

Question 2

Which equation correctly represents the components of aggregate demand?

Accepted Answer

$Y = C + I + G + NX$

Question 3

If the price level rises, what is the expected effect on household consumption according to the wealth effect?

Accepted Answer

Consumption decreases because the real value of household wealth falls.

Question 4

Which of the following describes the interest-rate effect on investment when the price level increases?

Accepted Answer

Higher price level leads to higher interest rates, which discourages investment.

Question 5

What happens to net exports when the U.S. price level rises relative to other countries?

Accepted Answer

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

Question 6

Why does the aggregate demand curve slope downward?

Accepted Answer

Higher price levels lead to lower consumption, investment, and net exports, reducing real GDP.

Question 7

Which of the following would shift the aggregate demand curve to the right?

Accepted Answer

An increase in government purchases ($G$)

Question 8

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

Accepted Answer

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

Question 9

If stricter immigration laws reduce the number of workers in the U.S., what happens to the short-run aggregate supply curve?

Accepted Answer

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

Question 10

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

Accepted Answer

The LRAS curve is vertical because potential GDP does not depend on the price level.

Question 11

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 other factors constant.

Question 12

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

Accepted Answer

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

Question 13

During a supply shock, such as a sudden increase in input prices, what is the immediate effect on the economy?

Accepted Answer

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

Question 14

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

Accepted Answer

Wages ($W$)

Question 15

If the exchange rate for the U.S. dollar rises, what is the expected effect on U.S. net exports?

Accepted Answer

Net exports decrease because U.S. goods become more expensive for foreigners.

Question 16

Suppose a recession is caused by a decrease in investment. According to the aggregate demand and supply model, what is the short-run effect?

Accepted Answer

Aggregate demand shifts left, leading to lower real GDP and higher unemployment.

Question 17

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

Accepted Answer

A decrease in input prices, such as wages or raw materials.

Question 18

What is stagflation?

Accepted Answer

A combination of inflation and recession caused by a supply shock.

Question 19

Which of the following is most likely to restore long-run equilibrium after a negative supply shock?

Accepted Answer

A rightward shift of the short-run aggregate supply curve as input prices fall and expectations adjust.

Question 20

Which of the following is true about potential GDP?

Accepted Answer

Potential GDP refers to the level of real GDP in the long run at full employment.

Aggregate Demand and Aggregate Supply: Principles and Applications

Study Guide - Practice Questions