Question 1

Which of the following best describes the shape and meaning of the Long-Run Aggregate Supply (LAS) curve?

Accepted Answer

It is vertical, indicating that in the long run, real GDP is determined by potential GDP and is independent of the price level.

Question 2

Suppose the economy experiences an increase in the money wage rate. What is the immediate effect on the short-run and long-run aggregate supply curves?

Accepted Answer

The SAS curve shifts leftward, but the LAS curve does not change.

Question 3

Which of the following scenarios would cause the Aggregate Demand (AD) curve to shift to the right?

Accepted Answer

Expectations of higher future income among consumers.

Question 4

If the price level rises but the money wage rate remains unchanged, what happens to the quantity of real GDP supplied in the short run?

Accepted Answer

It increases because the real wage falls, making production more profitable.

Question 5

Which of the following best explains the downward slope of the Aggregate Demand (AD) curve?

Accepted Answer

The substitution effect and the wealth effect.

Question 6

A negative supply shock, such as a sudden increase in oil prices, will most likely result in which of the following in the AS-AD model?

Accepted Answer

A leftward shift of the SAS curve, lower real GDP, and higher prices (stagflation).

Question 7

In the long run, if the economy is initially below potential GDP, what adjustment is expected according to the AS-AD model?

Accepted Answer

Nominal wages will fall, shifting the SAS curve rightward.

Question 8

Which of the following policies would a Keynesian economist most likely recommend during a recessionary gap?

Accepted Answer

Implementing fiscal stimulus to increase aggregate demand.

Question 9

If potential GDP increases due to technological advancement, what happens to the LAS and SAS curves?

Accepted Answer

Both LAS and SAS curves shift rightward.

Question 10

Suppose the Federal Reserve increases the money supply faster than the growth of potential GDP. What is the likely outcome in the AS-AD model?

Accepted Answer

The AD curve shifts rightward faster than the LAS curve, causing inflation.

Question 11

Which equation best represents the equilibrium condition in the AS-AD model?

Accepted Answer

$$ 	ext{Quantity of real GDP demanded} = 	ext{Quantity of real GDP supplied} $$

Question 12

A government stimulus package that increases government purchases will have what effect in the AS-AD model?

Accepted Answer

Shift the AD curve to the right, increasing real GDP and the price level in the short run.

Question 13

Which of the following is NOT a factor that shifts the Aggregate Demand (AD) curve?

Accepted Answer

Changes in the money wage rate.

Question 14

If the economy is experiencing an inflationary gap, what is the likely adjustment process in the long run?

Accepted Answer

Nominal wages rise, shifting the SAS curve leftward until real GDP returns to potential GDP.

Question 15

Which of the following best describes the Classical/Monetarist view of macroeconomic policy?

Accepted Answer

The economy is flexible enough to restore full employment without government intervention.

Question 16

A rise in the interest rate, all else equal, will have what effect on aggregate demand?

Accepted Answer

Decrease aggregate demand by making borrowing more expensive.

Question 17

Which of the following is a real-world example of a negative supply shock?

Accepted Answer

The oil price shocks of the 1970s.

Question 18

If the price level falls below the equilibrium level with a fixed money wage rate, what is the likely response of firms in the short run?

Accepted Answer

Firms decrease production and lower prices.

Question 19

Which of the following would shift both the LAS and SAS curves to the right?

Accepted Answer

An increase in the full-employment quantity of labor.

Question 20

Which of the following best describes the process of returning to full employment after a recessionary gap?

Accepted Answer

Nominal wages gradually fall, shifting the SAS curve rightward until real GDP equals potential GDP.

The AS-AD Model: Aggregate Supply and Aggregate Demand in Macroeconomics

Study Guide - Practice Questions

Study Guide - Flashcards