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Aggregate Demand and Aggregate Supply: Review Questions for AP Economics

By — McGraw-Hill Professional
Updated on Mar 4, 2011

The study guides for these review questions can be found at:

Questions

  1. Using the model of AD and AS, what happens to real GDP, the price level, and unemployment with more consumption spending (C)?
  2. Which is the best way to describe the AS curve in the long run?
    1. Always vertical in the long run.
    2. Always upward sloping because it follows the Law of Supply.
    3. Always horizontal.
    4. Always downward sloping.
    5. Without more information we cannot predict how it looks in the long run.
  3. Stagflation most likely results from
    1. increasing AD with constant AS.
    2. decreasing AS with constant AD.
    3. decreasing AD with constant AS.
    4. a decrease in both AD and AS.
    5. an increase in both AD and AS.
  4. Equilibrium real GDP is far below full employment and the government lowers household taxes. Which is the likely result?
    1. Unemployment falls with little inflation.
    2. Unemployment rises with little inflation.
    3. Unemployment falls with rampant inflation.
    4. Unemployment rises with rampant inflation.
    5. No change occurs in unemployment or inflation.
  5. What is the main contrast between the short-run and long-run Phillips curve?
    1. In the short run there is a positive relationship between inflation and unemployment, and in the long run the relationship is negative.
    2. In the short run there is a positive relationship between inflation and unemployment, and in the long run the relationship is constant.
    3. In the short run there is a negative relationship between inflation and unemployment, and in the long run the relationship is positive.
    4. In the short run there is a negative relationship between inflation and unemployment, and in the long run the relationship is constant.
    5. In the short run there is a constant relationship between inflation and unemployment, and in the long run the relationship is negative.
  6. The effect of the spending multiplier is lessened if
    1. the price level is constant with an increase in aggregate demand.
    2. the price level falls with an increase in aggregate supply.
    3. the price level is constant with an increase in long-run aggregate supply.
    4. the price level falls with an increase in both aggregate demand and aggregate supply.
    5. the price level rises with an increase in aggregate demand.

Answers and Explanations

  1. C—An increase in consumption spending increases, or shifts rightward, the AD curve, increasing the level of real GDP, the price level, and lowers the unemployment rate.
  2. A—All resources are employed at full employment in the long run so firms cannot respond to an increase in the price level by increasing production. Thus any increase in prices cannot increase production in the long run, and so AS is assumed to be vertical. Any short-run discrepancy in GDP, above or below, full employment adjusts back to GDPf in the long run.
  3. B—Stagflation is an increase in the price level and an increase in unemployment. This is most often the result of falling AS and a constant AD. Choice D is incorrect because a simultaneous decrease in AD puts downward pressure on the price level, which offsets the upward pressure from falling AS.
  4. A—A deep recession describes macroeconomic equilibrium in the horizontal section of AS. Here, rising AD increases real GDP, lowers unemployment rates, with little inflation.
  5. D—The short-run Phillips curve is downward sloping but vertical in the long run.
  6. E—The full spending multiplier effect of an increase in AD is felt only if there is no rise in the price.
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