Question 1

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

Accepted Answer

Because higher price levels reduce the real value of household wealth, increase interest rates, and make domestic goods more expensive relative to foreign goods.

Question 2

Suppose the Federal Reserve increases interest rates. What is the most likely short-run effect on the aggregate demand curve?

Accepted Answer

The AD curve shifts to the left because investment and consumption spending decrease.

Question 3

Which of the following events would cause a movement along the aggregate demand curve, rather than a shift of the curve?

Accepted Answer

A decrease in the price level, holding all other factors constant.

Question 4

If the U.S. dollar appreciates relative to foreign currencies, what is the likely effect on U.S. net exports and the aggregate demand curve?

Accepted Answer

Net exports decrease and the AD curve shifts left.

Question 5

Which of the following is NOT a reason why the short-run aggregate supply (SRAS) curve is upward sloping?

Accepted Answer

Firms always perfectly anticipate changes in the price level.

Question 6

Suppose a sudden increase in oil prices occurs. What is the most likely short-run effect on the SRAS curve and macroeconomic equilibrium?

Accepted Answer

SRAS shifts to the left, causing stagflation (higher prices and lower output).

Question 7

Which equation correctly represents the components of real GDP in the aggregate demand model?

Accepted Answer

$$Y = C + I + G + NX$$

Question 8

In the long run, the level of real GDP is determined by which of the following factors?

Accepted Answer

The number of workers, the level of technology, and the capital stock.

Question 9

If workers and firms expect the price level to rise in the future, what is the likely effect on the short-run aggregate supply curve?

Accepted Answer

SRAS shifts to the left.

Question 10

During the 2020 recession, which component of aggregate demand increased sharply in the latter part of the recession due to low interest rates and stimulus payments?

Accepted Answer

Residential investment.

Question 11

Which of the following best describes long-run macroeconomic equilibrium?

Accepted Answer

When the AD and SRAS curves intersect at the LRAS level.

Question 12

Suppose the government increases personal income taxes. What is the most likely effect on the aggregate demand curve?

Accepted Answer

AD shifts to the left because consumption spending falls.

Question 13

Which of the following scenarios would shift the SRAS curve to the right?

Accepted Answer

An increase in the labor force or capital stock.

Question 14

If total spending in the economy increases faster than production, what is the likely macroeconomic outcome according to the dynamic AD-AS model?

Accepted Answer

Inflation.

Question 15

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

Accepted Answer

A sudden increase in the price of oil.

Question 16

After a negative supply shock, what is the likely long-run adjustment if no policy action is taken?

Accepted Answer

SRAS shifts back to the right as wages and prices fall, restoring full employment.

Question 17

Which of the following best describes the effect of the Covid-19 pandemic on the U.S. economy in 2020?

Accepted Answer

Both the SRAS and AD curves shifted to the left, reducing real GDP.

Question 18

Which of the following is NOT a component of aggregate demand?

Accepted Answer

Imports (M)

Question 19

If firms become more optimistic about the future profitability of investment, what is the likely effect on the AD curve?

Accepted Answer

AD shifts to the right.

Question 20

Which of the following best explains why business cycles are not truly 'cycles'?

Accepted Answer

Because their length and severity vary greatly over time.

Aggregate Demand and Aggregate Supply Analysis – Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards