1.

How does the automatic adjustment mechanism move the economy to potential real gross domestic product (GDP)
in the long run when current real GDP is above potential GDP?
(A) Nominal wages fall, shifting the short-run aggregate supply curve to the right.
(B) Nominal wages fall, shifting the short-run aggregate supply curve to the left.
(C) Nominal wages do not change, shifting the short-run aggregate supply curve to the right.
(D) Nominal wages rise, shifting the short-run aggregate supply curve to the right.
(E) Nominal wages rise, shifting the short-run aggregate supply curve to the left.

2. The aggregate demand curve assumes that

(A) as the price of a good or service increases, nominal wages decrease
(B) as the domestic price level increases, consumers substitute domestic goods for foreign goods
(C) all prices and total consumer incomes are constant
(D) changes in the price level affect real wealth
(E) nominal interest rates increase as the price level decreases

3. In the long run, if aggregate demand decreases, real gross domestic product (GDP) and the price level will change in
which of the following ways?
 Real GDP Price Level
(A)
Decrease Decrease

Real GDP Price Level

(B)
Decrease Increase

Real GDP Price Level

(C)
No change Decrease

Real GDP Price Level

(D)
Increase Decrease

Real GDP Price Level

(E)
No change Increase

4. If a change in aggregate demand results in a recession, the price level and real output will change in which of the
following ways in the short run?
 Price Level Real Output
(A)
No change Increase

Price Level Real Output

(B)
Increase No change

Price Level Real Output

(C)
Increase Decrease

Price Level Real Output

(D)
Decrease No change

Price Level Real Output

(E)
Decrease Decrease

5. Aggregate demand may be measured by adding

(A) consumption, investment, savings, and imports
(B) savings, government spending, and business inventories
(C) consumption, investment, government spending, and net exports
(D) domestic private expenditures and government spending
(E) domestic expenditures and imports

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6.

According to the graph above, an increase in aggregate supply will most likely cause income and employment to
change in which of the following ways?

Income Employment
(A)
Decrease Decrease

Income Employment
(B)
Decrease Increase

Income Employment
(C)
No change Increase

Income Employment
(D)
Increase Decrease

Income Employment
(E)
Increase Increase

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7.

According to the graph above, which of the following is true about the long-run equilibrium of the economy
depicted?
(A) The economy is in long-run equilibrium.
(B) The aggregate demand curve will shift to the left to restore long-run equilibrium.
(C) The long-run aggregate supply curve will shift to the right to restore long-run equilibrium.
(D) Without a fiscal policy stimulus, the economy will remain in a recession.
(E) As wages increase, the short-run aggregate supply curve will shift to the left to restore long-run equilibrium.

8.

Assume the economy is in a short-run equilibrium at point L. In the absence of any fiscal or monetary policy
actions, what will happen in the long run?

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 (A) The curve will shift to the right, and the economy will be in long-run equilibrium at point J.
(B) The curve will shift to the right, and the economy will be in long-run equilibrium at point M.
The curve will shift to the right, the curve will shift to the left, and the economy will be in long-
(C)
run equilibrium at point M.
(D) The curve will shift to the left, and the economy will be in long-run equilibrium at point M.
(E) The curve will shift to the right, and the economy will be in long-run equilibrium at point K.

9.

The economy of a country is currently in equilibrium at point A in the diagram above. If the government does
nothing and wages are flexible, which of the following will most likely occur in the long run?
(A) Falling wages will shift the aggregate demand curve to the right, producing full employment.
(B) Rising wages will shift the aggregate demand curve to the right, producing full employment.
(C) The economy will remain at point A.
(D) Rising wages will shift the aggregate supply curve to the right, producing full employment.
(E) Falling wages will shift the aggregate supply curve to the right, producing full employment.

10.

Assume that the economy is at full-employment equilibrium in the diagram shown above. Which of the following
would lead to stagflation?

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 (A) A leftward shift of the short-run aggregate supply curve only
(B) A rightward shift of the short-run aggregate supply curve only
(C) A leftward shift of the aggregate demand curve only
(D) A rightward shift of the aggregate demand curve only
(E) A rightward shift in both the short-run aggregate supply curve and the aggregate demand curve

11. A rightward shift in the short-run aggregate supply curve will occur when
(A) exports exceed imports
(B) the money supply increases
(C) the prices of imported raw materials increase
(D) the stock of physical capital increases
(E) unions have negotiated a wage increase for their members

12. A change in which of the following will cause the short-run aggregate supply curve to shift?

I. The price level

II. Government spending

III. The cost of all inputs

(A) I only
(B) II only
(C) III only
(D) I and II only
(E) I, II, and III

13. Which of the following changes in aggregate demand and aggregate supply will cause an increase in both the price
level and unemployment?
(A) An increase in aggregate demand, and an increase in aggregate supply
(B) An increase in aggregate demand, and no change in aggregate supply
(C) No change in aggregate demand, and a decrease in aggregate supply
(D) A decrease in aggregate demand, and no change in aggregate supply
(E) A decrease in aggregate demand, and an increase in aggregate supply

14. An economy is at full-employment equilibrium. If consumers and firms become more optimistic about future
income and profits, which of the following will occur in the short run?
(A) Aggregate demand will shift rightward, increasing real output and decreasing the price level.
(B) Aggregate demand will shift rightward, decreasing real output and increasing the price level.
(C) Aggregate demand will shift rightward, increasing real output and the price level.
(D) Short-run aggregate supply will shift rightward, increasing real output and the price level.
(E) Short-run aggregate supply will shift rightward, decreasing real output and the price level.

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15. Which of the following changes would cause an economy’s aggregate demand curve to shift to the right?
(A) An increase in spending on imports
(B) An increase in autonomous consumption spending
(C) An increase in interest rates
(D) A decrease in the money supply
(E) A decrease in the overall price level in the economy

16. Recession can be caused by

(A) an increase in the price level
(B) an increase in exports
(C) a decrease in interest rates
(D) a decrease in aggregate demand
(E) a decrease in wages

17. A decrease in the prices of inputs will cause which of the following to occur in the short run?
(A) An increase in the aggregate demand and an increase in the price level
(B) A decrease in the aggregate demand and an increase in the price level
(C) An increase in the short-run aggregate supply and a decrease in the price level
(D) An increase in the short-run aggregate supply and an increase in the price level
(E) A decrease in the short-run aggregate supply and a decrease in the price level

18. A decrease in labor productivity will shift the

(A) aggregate demand curve to the right
(B) aggregate demand curve to the left
(C) long-run aggregate supply curve to the right
(D) short-run aggregate supply curve to the right
(E) short-run aggregate supply curve to the left

19. When firms restructure their operations to decrease production costs, the aggregate supply curve, the price level,
and real output will change in which of the following ways?

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 Aggregate Supply Curve Price Level Real Output
(A)
Shift to the left Increase Increase

Aggregate Supply Curve Price Level Real Output

(B)
Shift to the left Increase No change

Aggregate Supply Curve Price Level Real Output

(C)
Shift to the right Increase Increase

Aggregate Supply Curve Price Level Real Output

(D)
Shift to the right Decrease Increase

Aggregate Supply Curve Price Level Real Output

(E)
Shift to the right Decrease Decrease

20. Which of the following statements best describes the long-run aggregate supply curve?
(A) It is vertical because wages and input prices are fixed in the long run.
(B) It is vertical because wages and input prices are fully flexible in the long run.
(C) It is vertical because potential output is determined by a country’s central bank.
(D) It is upward sloping because wages and input prices are fixed in the long run.
(E) It is upward sloping because savings increase as interest rates rise.

21. Which of the following will result in a rightward shift of the aggregate demand curve?
(A) An increase in the income tax rate
(B) An increase in exports
(C) A decrease in the price level
(D) A decrease in household income
(E) A decrease in government spending

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22. Which of the following will cause a rightward shift of the short-run aggregate supply curve?
(A) An increase in consumption spending
(B) An increase in nominal wages
(C) An increase in income taxes
(D) A decrease in the price level
(E) A decrease in the costs of production

23. Which of the following changes will necessarily cause inflation?

(A) A decrease in aggregate demand and a decrease in short-run aggregate supply.
(B) A decrease in aggregate demand and an increase in short-run aggregate supply.
(C) A decrease in aggregate demand with no change in short-run aggregate supply.
(D) An increase in aggregate demand and a decrease in short-run aggregate supply.
(E) An increase in aggregate demand and an increase in short-run aggregate supply.

24. Assume that an economy is currently in long-run equilibrium and the short-run aggregate supply curve is upward
sloping. An adverse supply shock, such as a drought, will most likely cause which of the following to the economy
in the short run?
(A) A decrease in the price level and a decrease in the nominal wage
(B) A decrease in the price level and an increase in the nominal wage
(C) An increase in the price level and an increase in the nominal wage
(D) An increase in the price level and an increase in the real wage
(E) An increase in the price level and a decrease in the real wage

25. Assume that the economy is in long-run equilibrium. A shift in the aggregate demand curve will change
(A) only the price level in the long run
(B) only the output level in the long run
(C) both the price level and the output level in the long run
(D) neither the price level nor the output level in the short run
(E) only the price level in the short run and only the output level in the long run

26. Assume that the aggregate supply curve is upward sloping. If both aggregate supply and aggregate demand increase,
what will happen to the equilibrium output and price level?

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 Output Price Level
(A)
Decrease Decrease

Output Price Level

(B)
Decrease Increase

Output Price Level

(C)
Indeterminate Increase

Output Price Level

(D)
Increase Indeterminate

Output Price Level

(E)
Increase Increase

27. Which of the following will cause an increase in real output in the short run?
(A) A decrease in productivity
(B) A decrease in wages
(C) A decrease in government expenditure
(D) An increase in reserve requirements
(E) An increase in the discount rate

28. Which of the following will most likely result from a decrease in government spending?
(A) An increase in output
(B) An increase in the price level
(C) An increase in employment
(D) A decrease in aggregate supply
(E) A decrease in aggregate demand

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29.

According to the graph above, which of the following will necessarily result in a decrease in output?

I. A rightward shift of the aggregate demand curve

II. A leftward shift of the aggregate demand curve

III. A rightward shift of the aggregate supply curve

IV. A leftward shift of the aggregate supply curve

(A) I only
(B) III only
(C) I and III only
(D) II and III only
(E) II and IV only

30. An increase in personal income taxes will most likely cause aggregate demand and aggregate supply to change in
which of the following ways in the short run?

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 Aggregate Demand Aggregate Supply
(A)
Not change Decrease

Aggregate Demand Aggregate Supply

(B)
Not change Increase

Aggregate Demand Aggregate Supply

(C)
Decrease Not change

Aggregate Demand Aggregate Supply

(D)
Decrease Increase

Aggregate Demand Aggregate Supply

(E)
Increase Not change

31. Which of the following will most likely occur as a result of an increase in labor productivity in an economy?
(A) An increase in output and a decrease in inflation
(B) An increase in interest rates and a decrease in investment
(C) A decrease in both money demand and money supply
(D) A decrease in exports and an increase in unemployment
(E) A leftward shift in the short-run aggregate supply curve and a decrease in output

32. Which of the following would explain an increase in the price level and a decrease in real GDP in the short run?
(A) Workers successfully negotiated for higher wages.
(B) Consumers decreased their spending.
(C) The government decreased corporate taxes.
(D) The government decreased business regulations.
(E) Firms increased their investment spending.

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33. Which of the following would most likely cause a rightward shift in an economy's aggregate supply curve?
(A) An increase in interest rates
(B) A tax increase of 50 cents per gallon for gasoline
(C) An across-the-board reduction of wages in the manufacturing sector
(D) The passage of legislation mandating a reduction in automobile pollution
(E) The shutdown of plants and movement of production of goods abroad

34. With an increase in the real interest rate, consumption and real gross domestic product will most likely change in
which of the following ways?

Consumption Real Gross Domestic Product

(A)
Increase Increase

Consumption Real Gross Domestic Product

(B)
Increase Decrease

Consumption Real Gross Domestic Product

(C)
Decrease Increase

Consumption Real Gross Domestic Product

(D)
Decrease Decrease

Consumption Real Gross Domestic Product

(E)
No change Increase

35. Investment in physical capital is most likely to occur as a result of an increase in

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 (A) interest rates
(B) inflation rates
(C) business confidence
(D) money demand
(E) personal consumption

36. An economy is currently operating at the full-employment level of output. Which of the following would result in a
recessionary gap in the short run?
(A) An increase in the costs of production
(B) An improvement in the productivity of labor
(C) An increase in money supply
(D) A positive supply shock
(E) A decrease in income tax rates

37. With an upward-sloping aggregate supply curve, an increase in aggregate demand in the short run will
(A) increase the unemployment rate and the inflation rate
(B) decrease the unemployment rate and the inflation rate
(C) increase real output and the price level
(D) decrease real output and the price level
(E) leave real output and the price level unchanged

The diagram above shows a nation’s short-run aggregate supply curve , long-run aggregate supply curve
, and aggregate demand curve .
AD-AS Model quiz

Page 15 of 17
38. Based on the 39. In the y gap when
diagram above, model, which of the the short- 40. Which of the
which of the following is true? run
following is a
following describes equilibriu
The m real reason why the
(A)short-run
the aggregate demand
economy is output is at
equilibrium? in an curve is downward
the long-
(A) The inflationary run sloping?
economy is gap when the equilibriu
short-run (A) A higher
operating at m real price level
full equilibrium output.
real output is decreases
employment. The savings.
(D) below the
(B) The long-run economy is (B) A higher
economy is equilibrium in a price level
operating real output. recessionary
decreases
below full gap when the
The interest rates.
(B) employment. short-run
economy is equilibrium (C) A higher
(C) The in an real output is price level
economy is inflationar below the increases
operating y gap when long-run exports.
above full the short- equilibrium
employment. run (D) A higher
real output.
equilibriu price level
(D) There will be The decreases
(E) downward m real
output is at economy is imports.
pressure on the long- in a
the price recessionary (E) A higher
run price level
level. equilibriu gap when the
short-run decreases
(E) There is a m real
equilibrium real wealth.
recessionary output.
real output is
gap. The
(C) above the
economy is long-run
in a equilibrium
recessionar real output.

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ESSAY QUESTION

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