Question 1

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

Accepted Answer

LAS is vertical at potential GDP because potential GDP is independent of the price level.

Question 2

Suppose the money wage rate rises but potential GDP remains unchanged. What happens to the aggregate supply curves?

Accepted Answer

LAS remains unchanged and SAS shifts leftward.

Question 3

If the price level rises but the money wage rate is unchanged, what is the effect on the short-run aggregate supply (SAS) curve?

Accepted Answer

Firms increase production, moving up along the SAS curve.

Question 4

Which equation correctly represents aggregate demand?

Accepted Answer

$$Y = C + I + G + X - M$$

Question 5

A rise in the price level, other things remaining the same, causes which of the following according to the wealth effect?

Accepted Answer

People increase saving and decrease spending.

Question 6

Which of the following would cause a rightward shift in both the LAS and SAS curves?

Accepted Answer

An increase in potential GDP due to technological advancement.

Question 7

If the economy is at an above-full employment equilibrium, what is likely to happen in the long run?

Accepted Answer

The money wage rate rises, shifting the SAS curve leftward.

Question 8

Which of the following best explains the international substitution effect?

Accepted Answer

A rise in the price level increases the price of domestic goods relative to foreign goods, leading to more imports and fewer exports.

Question 9

Which policy action would most likely increase aggregate demand?

Accepted Answer

A cut in interest rates.

Question 10

If the foreign exchange rate falls, what is the expected effect on aggregate demand?

Accepted Answer

Exports increase and imports decrease, increasing aggregate demand.

Question 11

In the AS-AD model, what is the result if aggregate demand increases faster than long-run aggregate supply?

Accepted Answer

Inflation.

Question 12

Which of the following is a source of cost-push inflation?

Accepted Answer

An increase in the money wage rate.

Question 13

Suppose the economy is in a recessionary gap. What adjustment occurs in the long run?

Accepted Answer

The money wage rate falls, shifting the SAS curve rightward.

Question 14

Which of the following best describes stagflation?

Accepted Answer

A period of rising price level and decreasing real GDP.

Question 15

If expected inflation matches actual inflation, what is the effect on real GDP?

Accepted Answer

Real GDP remains at potential GDP.

Question 16

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

Accepted Answer

Money wage rate

Question 17

A demand-pull inflation spiral can only be sustained by which of the following?

Accepted Answer

Ongoing increases in the quantity of money.

Question 18

Which of the following would cause a leftward shift in the SAS curve but leave the LAS curve unchanged?

Accepted Answer

An increase in the money wage rate.

Question 19

If the business cycle is caused by fluctuations in aggregate demand and short-run aggregate supply, but the money wage does not adjust rapidly, what is the likely outcome?

Accepted Answer

The economy experiences output gaps (recessionary or inflationary).

Question 20

Which of the following scenarios would most likely result in economic growth in the AS-AD model?

Accepted Answer

A rightward shift in the LAS curve due to increased capital and technology.

Aggregate Supply, Aggregate Demand, and Macroeconomic Fluctuations: Study Notes

Study Guide - Practice Questions

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