Question 1

Which of the following best explains why the aggregate demand (AD) curve is downward sloping, according to the wealth effect?

Accepted Answer

As the price level rises, the real value of money holdings decreases, leading to lower consumption and aggregate expenditure.

Question 2

Suppose the domestic price level increases. What is the likely effect on net exports (NX) and why?

Accepted Answer

Net exports decrease because domestic goods become less internationally competitive.

Question 3

If the marginal propensity to consume (MPC) is 0.8, the net tax rate is 0.2, and the marginal propensity to import (MPM) is 0.1, what is the value of the simple multiplier (SM)?

Use the formula:
$$
SM = \frac{1}{1 - MPC(1 - t) + MPM}
$$

Accepted Answer

$$SM = \frac{1}{1 - 0.8(1 - 0.2) + 0.1} = 1.89$$

Question 4

Refer to the first image. If the price level falls from $$P_0 to$$ $$P_1$$, what happens to real GDP and why?

Accepted Answer

Real GDP increases because there is a movement down along the AD curve, increasing aggregate expenditure.

Question 5

Which of the following events would cause a rightward shift of the aggregate demand curve?

Accepted Answer

An increase in autonomous government spending.

Question 6

Suppose the government increases its spending by $$\Delta A = 50$$, and the simple multiplier is $$SM = 4. By $$how much does the aggregate demand curve shift horizontally?

Accepted Answer

$$\Delta Y = 200$$

Question 7

Which of the following best describes the effect of an increase in input prices (e.g., oil) on the aggregate supply (AS) curve?

Accepted Answer

The AS curve shifts upward, leading to higher prices and lower output.

Question 8

Refer to the fourth image. If the AD curve shifts from $$AD_0 to$$ $$AD_1$$, what happens to equilibrium price level and real GDP?

Accepted Answer

Both the equilibrium price level and real GDP increase.

Question 9

Which of the following scenarios would most likely cause a leftward shift in the aggregate supply curve?

Accepted Answer

An increase in wages across the economy.

Question 10

If the marginal propensity to consume is higher in Economy A than in Economy B, and both experience the same decrease in autonomous investment, which economy will experience a larger shift in its AD curve? Why?

Accepted Answer

Economy A, because a higher MPC leads to a larger multiplier.

Question 11

Suppose the price level rises exogenously. According to the wealth effect, what is the sequence of impacts on the private sector?

Accepted Answer

Private sector wealth decreases, leading to lower consumption and aggregate expenditure.

Question 12

Which of the following best describes the relationship between the steepness of the AS curve and the effects of an AD shock?

Accepted Answer

A steeper AS curve results in a larger price effect and a smaller output effect.

Question 13

If the domestic price level falls, what is the likely effect on exports and imports, and why?

Accepted Answer

Exports increase and imports decrease because domestic goods become more competitive.

Question 14

Suppose there is greater optimism over future economic prospects, leading to increased desired investment expenditure. What is the likely effect on AD, AS, equilibrium price level, and equilibrium GDP?

Accepted Answer

AD increases, AS does not change, equilibrium price level and equilibrium GDP both increase.

Question 15

Which of the following is a direct effect of a decrease in the real value of private sector wealth?

Accepted Answer

A decrease in autonomous consumption and a leftward shift in the AE curve.

Question 16

If the government increases its spending on goods and services by $$\Delta A$$, and the simple multiplier is $$SM$$, what is the formula for the horizontal shift in the AD curve?

Accepted Answer

$$\Delta Y = \Delta A 	imes SM$$

Question 17

Which of the following best describes the effect of a positive technology shock on the aggregate supply curve?

Accepted Answer

The AS curve shifts downward, leading to lower prices and higher output.

Question 18

Refer to the third image. If the price level rises from $$P_0 to$$ $$P_1$$, what happens to the quantity of aggregate output supplied, and why?

Accepted Answer

Aggregate output supplied increases because higher prices make it profitable for firms to produce more.

Aggregate Demand and Aggregate Supply: Short-Run Macroeconomic Equilibrium ch 8

Study Guide - Practice Questions

Study Guide - Flashcards