Practice Questions – Aggregate Demand & Supply – Answer Key

1..The interest-rate effect suggests that:

A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and
investment spending.
B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption
and investment spending.
C) an increase in the price level will increase the demand for money, increase interest rates, and decrease
consumption and investment spending.
D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption
and investment spending.
Answer: C

2. The real-balances (wealth) effect indicates that:

A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption
and investment spending.
B) a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C) a higher price level will increase the real value of many financial assets and therefore increase spending.
D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.
Answer: D

3. .The real-balances (wealth), and interest-rate, effects all help explain:

A) why the aggregate demand curve is downsloping.
B) why the aggregate supply curve is upsloping.
C) shifts in the aggregate demand curve.
D) shifts in the aggregate supply curve.
Answer: A

4. Which one of the following would not shift the aggregate demand curve?
A) a change in the price level
B) depreciation of the international value of the dollar
C) a decline in the interest rate at each possible price level
D) an increase in personal income tax rates
Answer: A

5. The economy's long-run AS curve assumes that wages and other resource prices:
A) eventually rise and fall to match upward or downward changes in the price level.
B) are flexible upward but inflexible downward.
C) rise and fall more rapidly than the price level.
D) are relatively inflexible both upward and downward.
Answer: A

6. The aggregate supply curve (short-run) slopes upward and to the right because:
A) changes in wages and other resource prices completely offset changes in the price level.
B) the price level is flexible upward but inflexible downward.
C) supply creates its own demand.
D) wages and other resource prices adjust only slowly to changes in the price level.
Answer: D

7. Other things equal, an improvement in productivity will:

A) shift the aggregate demand curve to the left.
B) shift the aggregate supply curve to the left.
C) shift the aggregate supply curve to the right.
D) increase the price level.
Answer: C

8.
 Practice Questions – Aggregate Demand & Supply – Answer Key
Which of the following would not shift the aggregate supply curve?
A) an increase in labor productivity
B) a decline in the price of imported oil
C) a decline in business taxes
D) an increase in the price level
Answer: D

Use the following to answer questions 72-81:

Type: Graphical Topic: 4 LO: 10-4 ECON: 198-200 MACRO: 198-200

9. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves.
A recession is depicted by:
A) panel (A) only.
B) panel (B) only.
C) panel (C) only.
D) panels (A) and (B).
Answer: D

Type: Graphical Topic: 4 LO: 10-4 ECON: 200 MACRO: 200

10. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves.
Cost-push inflation (“stagflation”) is depicted by:
A) panel (A) only.
B) panel (B) only.
C) panel (C) only.
D) panels (B) and (C).
Answer: B

11.We would expect a decline in personal and corporate income taxes to:
A) shift the aggregate demand curve rightward.
B) decrease consumption and investment spending.
C) decrease real output.
D) shift the aggregate supply curve leftward.
Answer: A
 Practice Questions – Aggregate Demand & Supply – Answer Key

12. Refer to the above data. The marginal propensity to consume is:
A) .25.
B) .75.
C) .20.
D) .80.
Answer: D

13. Refer to the above data. If disposable income was $325, we would expect consumption to be:
A) $315.
B) $305.
C) $20.
D) $290.
Answer: B

14. The multiplier can be calculated as:

A) 1/(MPS + MPC).
B) MPC/MPS.
C) 1/(1 - MPC).
D) 1 - MPC = MPS.
Answer: C

15. If the MPC is .6, the multiplier will be:

A) 4.0.
B) 6.0.
C) 2.5.
D) 1.67.
Answer: C

16. If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:
A) increase by $10 billion.
B) increase by $2.10 billion.
C) decrease by $4.29 billion.
D) increase by $4.29 billion.
Answer: A

17. Other things equal, a decrease in the real interest rate will:
A) shift the investment demand curve to the right.
B) shift the investment demand curve to the left.
C) move the economy upward along its existing investment demand curve.
D) move the economy downward along its existing investment demand curve.
Answer: D
 Practice Questions – Aggregate Demand & Supply – Answer Key
18.(Advanced analysis) If the equation C = 20 + .6Y, where C is consumption and Y is disposable income, were graphed:
A) the vertical intercept would be +.6 and the slope would be +20.
B) it would reveal an inverse relationship between consumption and disposable income.
C) the vertical intercept would be negative, but consumption would increase as disposable income rises.
D) the vertical intercept would be +20 and the slope would be +.6.
Answer: D

FRQ
1. Assume that the economy of Meekland is in a long-run equilibrium with a balanced government budget.

(a) Using a correctly labeled graph of aggregate supply and aggregate demand, show each of the following.

(i) Long-run aggregate supply

(ii) The output level, labeled YE, and the price level, labeled PLE

(b) Assume consumer confidence falls. Show on your graph in part (a) the short-run impact of the change in
consumer confidence and label the new equilibrium price level and output Y 1 and PL1, respectively.

(f) In the absence of any changes in fiscal and monetary policies, in the long run will the short-run aggregate
supply curve shift to the left, shift to the right, or remain unchanged as a result of the fall in consumer confidence?
Explain.
(a)
LRAS
SRAS

PL

PLe

AD

Ye
Real GDP
(b)
LRAS
SRAS

PL

PL1

AD
AD1

Y1 Ye
Real GDP
 Practice Questions – Aggregate Demand & Supply – Answer Key
(c)
LRAS
SRAS
SRAS1
PL

PL1

PL E2 AD
AD1

Y1 Ye
Real GDP