Question 1

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

Accepted Answer

Because as the price level falls, the real value of household wealth rises, interest rates fall, and net exports increase.

Question 2

Suppose the government increases its purchases of goods and services. What is the most likely short-run effect on the aggregate demand curve?

Accepted Answer

The AD curve shifts to the right.

Question 3

If the price level in Canada rises relative to other countries, what is the expected effect on net exports and aggregate demand?

Accepted Answer

Net exports fall, shifting AD to the left.

Question 4

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

Accepted Answer

A change in the price level.

Question 5

Given the equation $$Y = C + I + G + NX$$, which component would be directly affected by a change in business taxes?

Accepted Answer

I (Investment)

Question 6

According to the sticky-wage theory, what happens if the actual price level $$P is $$greater than the expected price level $$PE$$?

Accepted Answer

Firms increase output because revenue is higher but labor costs are fixed.

Question 7

Which equation summarizes the relationship between actual output, potential output, and unexpected changes in the price level?

Accepted Answer

$$Y = Y_N + a(P - PE)$$

Question 8

A positive productivity shock occurs in the economy. What is the likely effect on the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts to the right.

Question 9

If workers and firms expect higher future prices, what will happen to the short-run aggregate supply (SRAS) curve?

Accepted Answer

SRAS shifts to the left.

Question 10

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

Accepted Answer

The intersection of AD, SRAS, and LRAS at the same point.

Question 11

A negative supply shock, such as a sudden increase in oil prices, will most likely cause which of the following in the short run?

Accepted Answer

An increase in the price level and a decrease in real GDP.

Question 12

Which school of thought argues that most fluctuations in real output are caused by changes in the money supply and recommends a constant growth rate of money?

Accepted Answer

Monetarist

Question 13

According to the Real Business Cycle model, what is the main source of fluctuations in real GDP?

Accepted Answer

Temporary shocks to productivity

Question 14

If the exchange rate (value of the dollar) rises relative to foreign currencies, what is the expected effect on net exports and aggregate demand?

Accepted Answer

Net exports fall, shifting AD to the left.

Question 15

Suppose the economy is in a recession due to a decrease in aggregate demand. According to the automatic adjustment mechanism, what will eventually happen in the long run?

Accepted Answer

SRAS will shift right, restoring output to potential GDP at a lower price level.

Question 16

Which of the following is an example of a variable that would shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

An increase in the labor force

Question 17

Which of the following best describes stagflation?

Accepted Answer

A combination of inflation and recession, usually due to a supply shock

Question 18

If the growth rate of domestic GDP exceeds the growth rate of foreign GDP, what is the likely effect on net exports?

Accepted Answer

Net exports will decrease because imports rise faster than exports.

Question 19

Which of the following would cause the short-run aggregate supply (SRAS) curve to shift to the left?

Accepted Answer

An increase in the expected price of an important natural resource

Question 20

According to the New Classical model, what is the best way to minimize fluctuations in real GDP?

Accepted Answer

Help workers and firms form correct expectations about price levels

Aggregate Demand and Aggregate Supply Analysis – Macroeconomics Study Notes

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