MCQs of Economics - The Aggregate Demand Aggregate Supply Model – Multiple Choice Question

Question 1 of 20

1. Question

Which of the following statements about economic fluctuations is true?

None of these answers
A depression is a mild recession
A variety of spending income, and output measures can be used to measure economic fluctuation because most macroeconomic quantitties tend to fluctuate together
A recession is when output rises above the natural rate of output

Question 2 of 20

2. Question

According to the interest rate effect aggregate demand slopes downward (negatively) because:

lower prices increase money holdings decrease lending interest rates rise, and investment spending falls
lower prices increase the value of money holding and consumer spending increases
lower prices decrease the value of money holdings and consumers spending decreases
lower prices reduce money holdings increase lending interest rates fall, and investment spending increase

Question 3 of 20

3. Question

Which of the following would not cause a shift in the long-run aggregate supply curve?

All of these answers shift the long-run aggregate supply curve
An increase in the available capital
An increase in the available labour
An increase in price expectations

Question 4 of 20

4. Question

Which of the following is not a reason why the aggregate demand curve slopes downward?

The exchange-rate effect
The wealth effect
The classical dichotomy/monetary neutrality effect
The interest-rate effect

Question 5 of 20

5. Question

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to:

shift the short-run aggregate supply curve to the left
shift the aggregate demand curve to the right
shift the short-run aggregate supply curve to the right
shift the aggregate demand curve to the left

Question 6 of 20

6. Question

Which of the following statements is true regarding the long-run aggregate supply curve? The long-run aggregate supply cruve

Is vertical because an equal change in all prices and wages leaves output unaffected
is positively sloped because price expectations and wages tend to be fixed is the long run
shifts right when the government raises the minimum wage
shifts left when the natural rate of unemployment falls

Question 7 of 20

7. Question

According to the wealth effect aggregate demand slopes downward (negatively) because

lower prices increase the value of money holding and consumers spending increase
lower prices decrease the value of money holding and consumers spending decrease
lower prices reduce money holding increase lending, interest rates fall and investment spending increase
lower prices increase money holding decrease lending, interest rates rise and investment spending falls

Question 8 of 20

8. Question

The natural rate of output is the amount of real GDP produced:

When the economy is at the natural rate of unemployment
When the economy is at the natural rate of investment
When the economy is at the natural rate of aggregate demand
When there is no no unemployment

Question 9 of 20

9. Question

Suppose the price level falls but because of fixed nominal wage contracts the real wage rises and firms cut back on production This is a demonstration of the

sticky-wage theory of the short-run aggregate supply curve
classical dichotomy theory of the short-run aggregate supply curve
misperceptions theory of the short-run aggregate supply curve
sticky-price theory of the short run aggregate supply curve

Question 10 of 20

10. Question

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen Thinking there has been a fall in the relative price of their product they cut back on production, This is a demonstration of the

misperceptions theory of the short run aggregate supply curve
classical dichotomy theory of the short run aggregate supply curve
sticky price theory of the short run aggregate supply curve
sticky wage theory of the short run aggregate supply curve

Question 11 of 20

11. Question

Suppose the economy is initially in long-run equilibrium Then suppose there is an increase in military spending due to rising international tensions According to the model of aggregate demand and aggregate supply what happens to prices and output in the short run?

Price fall; output rises
Price fall; output falls
Price rise; output fall
Price rise; output rise

Question 12 of 20

12. Question

Suppose the economy is initially in long-run equilibrium Then suppose there is an increase in military spending due to rising international tensions According to the model of aggregate demand and aggregate supply what happens to prices and output in the long run?

Output falls; prices are unchanged from the initial value
Price fall; output is unchanged from its initial value
Output and the price level are unchanged from their initial values
Prices rise; output is unchanged from its initial value

Question 13 of 20

13. Question

Suppose the economy is initially is long run equilibrium Then suppose there is a drought that destroys much of the wheat crop According to the model of aggregate demand and aggregate supply, what happens of prices and output in the short run?

Price rise; output falls
Price fall; output rises
Price rise; output rises
Price fall; output falls

Question 14 of 20

14. Question

Suppose the economy is initially in long run equilibrium Then suppose there is a drought that destroys much of the wheat crop if policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model to aggregate demand and aggregate supply what happens to prices and output in the long run?

Output rises; prices are unchanged from the initial value
Output and the price level are unchanged from their initial values
Output falls; prices are unchanged from the initial value
Prices fall; output is unchanged from its initial value

Question 15 of 20

15. Question

Stagflation occurs when the economy experiences:

rising prices and rising output
rising prices and falling output
falling prices and falling output
falling prices and rising output

Question 16 of 20

16. Question

Which of the following events shifts the short run aggregate supply curve to the right?

a decrease in the money supply
a drop in oil prices
an increase in government spending on military equipment
None of these answers
an increase in price expectations

Question 17 of 20

17. Question

Refers to Exhibit 4. Suppose the economy is operating in a recession such as point B in Exhibit 4. If policy makers wished to move output to its long run natural rate they should attempt to:

Shift aggregate demand to the left
Shift short run aggregate supply to the left
shift aggregate demand to the right
shift short-run aggregate supply to the right

Question 18 of 20

18. Question

Refers to Exhibit 4. Suppose the economy is operating in a recession such as point B in Exhibit 4. If policy makers allow the economy to adjust to the long run natural rate on its own,

People will reduce their price expectations and the short run aggregate supply will shift right
People will raise their price expectations and aggregate demand will shift left
People will raise their price expectations and the short run aggregate supply will shift left
People will reduce their price expectations and aggregate demand will shift right

Question 19 of 20

19. Question

According to the model of aggregate supply and aggregate demand in the long run an increase in the money supply should cause:

Prices to rise and output to rise
Price to fall and output to remain unchanged
Prices to fall and output to fall
prices to rise and output to remain unchanged

Question 20 of 20

20. Question

Policy makers are said to “accommodate” an adverse supply shock if they

fail to respond to the adverse supply shock and allow the economy to adjust on its own.
respond to the adverse supply shock by decreasing aggregate demand which lower prices
respond to the adverse supply shock by decreasing short run aggregate supply
respond to the adverse supply shock by increasing aggregate demand, which further raises prices

MCQs of Economics – The Aggregate Demand Aggregate Supply Model

Economics - The Aggregate Demand Aggregate Supply Model

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