Question 1

Which of the following best explains why the short-run aggregate supply (AS) curve is upward sloping?

Accepted Answer

Because wage changes lag behind price changes, making it profitable for firms to increase output when prices rise.

Question 2

Suppose the Federal Reserve observes a rise in the overall price level (P). According to the Fed rule, what is the likely response?

Accepted Answer

The Fed will raise the interest rate (r), which will decrease investment (I) and output (Y).

Question 3

A leftward shift of the short-run aggregate supply (AS) curve can be caused by:

Accepted Answer

An increase in wage rates or energy prices (a cost shock).

Question 4

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

Accepted Answer

It is vertical at the level of potential output, reflecting the economy’s maximum sustainable output.

Question 5

If the government increases spending (G) while the interest rate (r) is fixed, what happens to the IS curve?

Accepted Answer

The IS curve shifts to the right, increasing equilibrium output (Y).

Question 6

Which of the following is a reason for the downward slope of the aggregate demand (AD) curve?

Accepted Answer

A higher price level (P) leads the Fed to raise the interest rate (r), reducing investment (I) and output (Y).

Question 7

Stagflation is best described as:

Accepted Answer

A simultaneous increase in unemployment and inflation.

Question 8

Which of the following is an example of an automatic stabilizer?

Accepted Answer

Unemployment insurance payments that increase during recessions.

Question 9

According to Okun’s Law, if real GDP increases by 3%, the unemployment rate is expected to:

Accepted Answer

Decrease by about 1 percentage point.

Question 10

Which of the following best describes the life-cycle theory of consumption?

Accepted Answer

Households make lifetime consumption decisions based on their expectations of lifetime income.

Question 11

A country experiencing capital flight is likely to:

Accepted Answer

Lose both human and financial capital to countries with higher expected returns and less risk.

Question 12

Which of the following is a likely effect of a binding zero interest rate bound?

Accepted Answer

The AD curve becomes vertical because the interest rate cannot fall below zero.

Question 13

Which of the following is NOT a reason for the existence of unemployment according to the study materials?

Accepted Answer

Perfectly flexible wages.

Question 14

If a developing country suffers from a 'vicious circle of poverty,' what does this imply?

Accepted Answer

Poverty is self-perpetuating because the country cannot save and invest enough to grow.

Question 15

Which of the following best describes the Phillips Curve in the long run?

Accepted Answer

It is vertical at the natural rate of unemployment.

Question 16

Suppose the government implements a deficit targeting rule during a recession. According to the study materials, what is a likely macroeconomic consequence?

Accepted Answer

Income will decline more than it would have without deficit targeting, making the recession worse.

Question 17

Which of the following is an example of a cost-push (supply-side) inflation?

Accepted Answer

An increase in oil prices shifts the AS curve to the left, raising prices and reducing output.

Question 18

Which of the following is a likely effect of an increase in household wealth, holding everything else constant?

Accepted Answer

Households will increase consumption and decrease labor supply.

Question 19

Which of the following best describes the accelerator effect in firm investment?

Accepted Answer

Investment increases when aggregate output increases, accelerating the growth of output.

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