Question 1

Which of the following best explains why the aggregate demand (AD) curve is downward sloping?

Accepted Answer

Because as the price level rises, the real value of wealth falls, reducing consumption and aggregate demand.

Question 2

Suppose the government increases its spending on infrastructure. What is the most likely short-run effect on the AD/AS model?

Accepted Answer

The AD curve shifts to the right, increasing real GDP and the price level.

Question 3

Which of the following events would cause a leftward shift in the short-run aggregate supply (SRAS) curve?

Accepted Answer

A natural disaster that disrupts production.

Question 4

Why is the long-run aggregate supply (LRAS) curve vertical?

Accepted Answer

Because in the long run, the price level does not affect the economy's potential output.

Question 5

If the central bank raises interest rates in response to rising inflation, what is the most likely effect on aggregate demand?

Accepted Answer

Aggregate demand will decrease due to lower consumption and investment.

Question 6

A fall in a nation’s productivity level will shift which curve, and in which direction?

Accepted Answer

Aggregate supply (AS) curve to the left.

Question 7

World oil prices rise by 30%. On an AD/AS diagram, this would cause a decrease in:

Accepted Answer

The short-run AS curve as firms face higher costs.

Question 8

An increase in Australia’s export price index is most likely to shift which curve, and in which direction?

Accepted Answer

Aggregate demand curve to the right.

Question 9

If the economy is experiencing a contractionary gap, which of the following is true?

Accepted Answer

Actual output is below potential output, and cyclical unemployment is high.

Question 10

Which of the following would most likely cause the long-run aggregate supply (LRAS) curve to shift to the right?

Accepted Answer

A technological advancement that increases productivity.

Question 11

Suppose the government cuts income taxes. What is the most likely effect on the AD/AS model?

Accepted Answer

The AD curve shifts to the right due to increased disposable income and consumption.

Question 12

Which of the following best describes the effect of a positive supply-side shock in the AD/AS model?

Accepted Answer

The SRAS curve shifts to the right, increasing real GDP and lowering the price level.

Question 13

If the economy is operating above its potential output, what is this situation called and what are its likely characteristics?

Accepted Answer

An expansionary gap; low unemployment and upward pressure on wages and prices.

Question 14

Which of the following is a likely long-term effect if government debt is used to finance productive infrastructure?

Accepted Answer

A rightward shift in the LRAS curve due to increased productivity.

Question 15

Which of the following best describes the multiplier effect in the context of the AD/AS model?

Accepted Answer

An initial increase in aggregate demand leads to a larger overall increase in national income.

Question 16

If a country experiences a negative output gap, which of the following is most likely to occur?

Accepted Answer

High levels of cyclical unemployment and lower inflation.

Question 17

Which of the following scenarios would most likely result in stagflation?

Accepted Answer

A leftward shift in the SRAS curve.

Question 18

If the economy moves from one macroeconomic equilibrium to another due to a positive demand-side shock, what is the likely short-run outcome?

Accepted Answer

Higher real GDP and a higher price level.

Question 19

Which of the following would NOT cause a shift in the aggregate demand curve?

Accepted Answer

A change in the price level.

The Aggregate Demand and Aggregate Supply (AD/AS) Model: Structure, Shifts, and Macroeconomic Equilibrium

Study Guide - Practice Questions