Question 1

Which of the following best describes a recession, as defined in the study materials?

Accepted Answer

A significant, widespread decline in real income and employment.

Question 2

According to the dynamic quantity theory of money, which equation correctly relates money growth, velocity growth, inflation, and real GDP growth?

Accepted Answer

$$M + v = \pi + Y$$

Question 3

If the money supply is growing at 6%, velocity is constant, and real GDP is growing at 2%, what is the inflation rate according to the AD curve?

Accepted Answer

$$4\%$$

Question 4

Which of the following would cause the aggregate demand (AD) curve to shift to the right?

Accepted Answer

An increase in the growth rate of velocity.

Question 5

The long-run aggregate supply (LRAS) curve is vertical because:

Accepted Answer

The Solow growth rate is independent of inflation.

Question 6

A negative real shock, such as a major oil price increase, will most likely:

Accepted Answer

Shift the LRAS curve to the left.

Question 7

Which of the following is an example of a real shock?

Accepted Answer

A new technology that increases productivity.

Question 8

During the COVID-19 recession, which of the following occurred according to the AD–AS model?

Accepted Answer

Both the LRAS and AD curves shifted to the left.

Question 9

Menu costs are best described as:

Accepted Answer

The costs associated with changing the prices of goods and services.

Question 10

If workers confuse a nominal wage increase with a real wage increase, this is known as:

Accepted Answer

Nominal wage confusion.

Question 11

Suppose the growth rate of the money supply decreases while velocity remains constant. What is the likely effect on the AD curve?

Accepted Answer

The AD curve shifts to the left.

Question 12

Which of the following best explains why the SRAS curve is upward sloping?

Accepted Answer

Because prices and wages are sticky in the short run.

Question 13

A positive aggregate demand shock in the short run will:

Accepted Answer

Increase both inflation and real GDP growth.

Question 14

Which of the following events is most likely to shift the LRAS curve to the right?

Accepted Answer

A technological innovation that increases productivity.

Question 15

During the Great Recession, what was the primary cause of the decrease in aggregate demand?

Accepted Answer

A run on shadow banks leading to a decline in credit availability.

Question 16

If the AD curve is defined by $$M + v = \pi + Y$$ and $$M = 4\%$$, $$v = 1\%$$, and $$Y = 2\%$$, what is the inflation rate?

Accepted Answer

$$3\%$$

Question 17

Which of the following is NOT a plausible cause of a real shock?

Accepted Answer

A sudden change in consumer preferences.

Question 18

If the economy is experiencing sticky wages and prices, what is the likely effect of a sudden decrease in aggregate demand?

Accepted Answer

A prolonged recession with lower real growth and inflation.

Question 19

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

Accepted Answer

It increases only the inflation rate.

Question 20

Which of the following is a likely consequence of higher business taxes, according to the AD–AS model?

Accepted Answer

A leftward shift of the LRAS curve.

Business Fluctuations: Aggregate Demand and Supply – Study Notes

Study Guide - Practice Questions