AS Practice Questions
Aggregate Demand & Supply Analysis
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The aggregate demand curve....
a) is up-sloping because a higher price level is necessary to make production profitable as production costs rise.
b) ) is down sloping because production costs decline as real output increases.
c) shows the amount of expenditures required to induce the production of each possible level of real output.
d) shows the amount of real output that will be purchased at each possible price level.
Answer : d
2. The aggregate demand curve is....
a) vertical if full employment exists.
b) horizontal when there is considerable inflation in the economy.
c) down sloping because of the interest-rate, wealth, and international trade effects.
d) down sloping because production costs decrease as real output rises.
Answer : c
3. 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
4. The 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
5. The interest-rate and wealth effects are important because they help explain ...
a) rightward and leftward shifts of the aggregate demand curve.
b) why fiscal policy cannot be used effectively to curb inflation.
c) the shape of the aggregate demand curve.
d) the shape of the aggregate supply curve.
Answer : c
6. The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the...
a) real-balances, interest-rate, and foreign purchases effects.
b) determinants of aggregate supply.
c) determinants of aggregate demand.
d) sole determinants of the equilibrium price level and the equilibrium real output.
Answer : c
6. Other things equal, if the national incomes of the major trading partners of the United Kingdom were to rise, the U.K...
a) aggregate demand curve would shift to the right.
b) aggregate supply curve would shift to the left.
c) aggregate supply curve would shift to the right.
d) aggregate demand curve would shift to the left.
Answer : a
7. 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
8. A decline in investment will shift the AD curve to the...
a) left by a multiple of the change in investment.
b) left by the same amount as the change in investment.
c) right by the same amount as the change in investment.
d) right by a multiple of the change in investment.
Answer : a
9. A decline in investment will shift the AD curve to the...
a) left by a multiple of the change in investment.
b) left by the same amount as the change in investment.
c) right by the same amount as the change in investment.
d) right by a multiple of the change in investment.
Answer : a
10. A decline in investment will shift the AD curve to the...
a) left by a multiple of the change in investment.
b) left by the same amount as the change in investment.
c) right by the same amount as the change in investment.
d) right by a multiple of the change in investment.
Answer : d
11. The aggregate supply curve...
a) is explained by the interest rate, real-balances, and foreign purchases effects.
b) gets steeper as the economy moves from the top of the curve to the bottom of the curve.
c) shows the various amounts of real output that businesses will produce at each price level.
d) is down sloping because real purchasing power increases as the price level falls.
Answer : c
12. The aggregate supply curve (short-run)...
a) slopes downward and to the right.
b) graphs as a vertical line.
c) slopes upward and to the right.
d) graphs as a horizontal line.
Answer : c
13. 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
14. True / False
a) The interest-rate effect is one of the determinants of aggregate demand.
b) Other things equal, an increase in productivity will shift the aggregate supply curve rightward.
c) An increase in indirect taxes will shift the aggregate supply curve leftward.
d) The shape of the aggregate supply curve is determined by what happens to aggregate demand as real output expands.
e) The wealth effect indicates that inflation makes the public feel poorer and they therefore spend less out of their current incomes.
f) The aggregate supply curve (short-run) becomes steeper as the economy moves leftward and downward along it.
g) The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve.
Answer
a. False
b. True
c. True
d. False
e. True
f. False
g. True
15. The aggregate demand curve slopes downwards. This is largely because
a) of a substitution effect of a rise in the price level.
b) of a income effect of a rise in the price level.
Answer : a
16. There are various factors that can cause the aggregate demand curve to shift. What effect will the following have on the aggregate demand curve?
a) The government decreases the money supply.
b) The government decreases taxes.
c) The government decreases its spending.
d) People anticipate a rise in the rate of inflation.
e) Lower prices lead to lower interest rates.
f) The government increases interest rates.
g) An increase in prices abroad leads to an increase in the demand for UK exports.
Answer :
a) Leftward shift
b) Rightward shift
c) Leftward shift
d) Leftward shift
e) movement along the Aggregate demand curve
f) Leftward shift
g) Rightward shift
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