Question 1

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

Accepted Answer

It is upward sloping, becoming steeper as the economy approaches capacity.

Question 2

A leftward shift of the short-run AS curve could be caused by:

Accepted Answer

An increase in wage rates or a supply shock that raises production costs

Question 3

Why does the aggregate demand (AD) curve slope downward?

Accepted Answer

Because as the price level rises, the Fed raises the interest rate, which reduces investment and output.

Question 4

Suppose the Federal Reserve increases the interest rate. What is the most likely effect on planned aggregate expenditure (AE) and equilibrium output (Y)?

Accepted Answer

AE decreases and Y decreases.

Question 5

Which equation best represents the IS curve in the goods market?

Accepted Answer

$$Y = C + I(r) + G$$

Question 6

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

Accepted Answer

It shifts to the right.

Question 7

What is the primary reason the long-run aggregate supply (AS) curve is vertical?

Accepted Answer

Because prices and wages are flexible in the long run, and output is determined by resources and technology.

Question 8

A positive cost shock (such as a sudden increase in oil prices) will most likely:

Accepted Answer

Shift the short-run AS curve to the left.

Question 9

Which of the following best describes potential output (potential GDP)?

Accepted Answer

The level of aggregate output that can be sustained in the long run without inflation.

Question 10

If the price level increases, what is the sequence of effects that leads to a movement along the AD curve?

Accepted Answer

The Fed raises the interest rate, investment falls, and output decreases.

Question 11

Which of the following is an example of a real wealth effect?

Accepted Answer

A decrease in the price level increases consumers’ real wealth, leading to higher consumption.

Question 12

What is the equilibrium in the aggregate demand and aggregate supply (AD-AS) model?

Accepted Answer

The point where the AD and AS curves intersect, determining the equilibrium price level and output.

Question 13

Suppose the economy is operating above potential output. In the long run, what is likely to happen?

Accepted Answer

Wages will rise, shifting the short-run AS curve left, and output will return to potential.

Question 14

Which of the following is a plausible effect of a decrease in government spending (G) in the IS-LM/AD-AS framework?

Accepted Answer

The IS curve shifts left, leading to a leftward shift of the AD curve.

Question 15

If the economy experiences a positive supply shock, such as a technological improvement, what is the likely effect on the short-run AS curve?

Accepted Answer

It shifts to the right, increasing output and lowering the price level.

Question 16

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

Accepted Answer

Because wages are a large fraction of total costs and wage changes lag behind price changes.

Question 17

A supply shock that increases the marginal cost of production will:

Accepted Answer

Shift the short-run AS curve to the left.

Question 18

Which of the following is NOT a reason for a downward-sloping AD curve?

Accepted Answer

The AS curve shifts right when the price level increases.

Question 19

If the Fed wants to fight inflation but avoid a recession, what challenge does it face?

Accepted Answer

Raising interest rates to reduce inflation may also reduce output and increase unemployment.

Question 20

Which of the following best describes the effect of a rightward shift in the AD curve when the economy is at potential output?

Accepted Answer

In the short run, output rises above potential and the price level increases; in the long run, wages rise and output returns to potential.

chp 11

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