Question 1

Which of the following variables are most closely associated with the position of the Long-Run Aggregate Supply (LRAS) curve in the AS-AD model?

Accepted Answer

Labor (L), Capital (K), and Technology (T)

Question 2

Suppose the economy is experiencing a recessionary gap. Actual RGDP is $$30T, Potential GDP is 35T$$, and actual unemployment is 8% while full-employment unemployment is 5%. Which of the following best describes the position of the equilibrium in the AS-AD model?

Accepted Answer

Equilibrium is to the left of LRAS, with actual RGDP below potential.

Question 3

If the government wants to close a recessionary gap using discretionary fiscal policy, which combination of actions would be most effective?

Accepted Answer

Increase government expenditures and decrease taxes

Question 4

In the context of the AS-AD model, what is the likely effect of an expansionary fiscal policy on the Aggregate Demand (AD) curve?

Accepted Answer

It shifts the AD curve to the right

Question 5

Given an inflationary gap where Actual RGDP = $$38T, Potential GDP = 35T$$, and actual unemployment is 3%, what fiscal policy action would help return the economy to full employment?

Accepted Answer

Decrease government spending or increase taxes

Question 6

Which of the following best explains the 'crowding out effect' in the context of expansionary fiscal policy?

Accepted Answer

Government spending reduces private investment by raising interest rates

Question 7

If the government increases its expenditures by $$500 billion to close a recessionary gap, but the crowding out effect reduces private investment by 200 $$billion, what is the net effect on Aggregate Demand?

Accepted Answer

$300 billion increase

Question 8

Which of the following equations correctly represents the relationship between Actual RGDP, Potential GDP, and the Output Gap?

Accepted Answer

$$Output\ Gap = Actual\ RGDP - Potential\ GDP$$

Question 9

Which of the following scenarios best illustrates a direct expenditures offset?

Accepted Answer

Government spending replaces private sector spending, leaving total spending unchanged

Question 10

If the economy is at full employment and the government increases spending, what is the most likely short-run effect on the price level and output?

Accepted Answer

Price level rises, output rises above potential

Question 11

Suppose the government implements a tax cut to close a recessionary gap. Which sequence best describes the transmission mechanism in the AS-AD model?

Accepted Answer

Tax cut increases disposable income $$\rightarrow$$ consumption rises $$\rightarrow AD $$shifts right $$\rightarrow$$ output increases

Question 12

Which of the following best describes the difference between the SRAS and LRAS curves?

Accepted Answer

SRAS is upward sloping, LRAS is vertical

Question 13

If the economy is experiencing an inflationary gap, what is the likely effect on unemployment relative to the natural rate?

Accepted Answer

Unemployment is below the natural rate

Question 14

Which of the following fiscal policy actions would be most appropriate if actual unemployment is 3% and the full-employment level is 5%?

Accepted Answer

Increase taxes or decrease government spending

Question 15

If the government increases spending by $100 billion and the marginal propensity to consume (MPC) is 0.8, what is the total change in Aggregate Demand, ignoring crowding out?

Accepted Answer

$$\Delta AD = \frac{1}{1-0.8} 	imes 100 = 500\ billion$$

Question 16

Which of the following best describes the effect of a decrease in taxes during a recessionary gap?

Accepted Answer

It increases disposable income, leading to higher consumption and a rightward shift in AD

Question 17

If the government increases spending to close a recessionary gap but the direct expenditures offset is complete, what is the net effect on Aggregate Demand?

Accepted Answer

Aggregate Demand does not change

Question 18

Which of the following is NOT a variable that shifts the LRAS curve?

Accepted Answer

A change in the price level

Question 19

Suppose the government increases spending to close a recessionary gap, but the increase in interest rates causes private investment to fall by the same amount. What is this scenario an example of?

Accepted Answer

The crowding out effect

Question 20

If the economy is at equilibrium where Actual RGDP equals Potential GDP, which of the following is true?

Accepted Answer

Unemployment is at the natural rate

Aggregate Supply and Demand Model: Gaps, Policy, and Offsetting Effects

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