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
(A) Level
Decreas Decreas
e e

Real GDP Price

(B) Level
Decreas Increas
e e

Real GDP Price

(C) Level
No Decreas
change e

Real GDP Price

(D) Level
Increas Decreas
e e

Real GDP Price

(E) Level
No Increas
change e

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 Real
(B) Level Output
Increas No
e change

Price Level Real Output

(C)
Increase Decrease

Price Real
(D) Level Output
Decreas No
e change

Price Real
(E) Level Output
Decreas Decreas
e e

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?

Incom Employme
(A) e nt
Decreas Decreas
e e

Incom Employme
(B) e nt
Decreas Increas
e e

Incom Employme
(C) e nt
No Increas
change e

Incom Employme
(D) e nt
Increas Decreas
e e

Incom Employme
(E) e nt
Increas Increas
e e

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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?

Page 5 of 18
 (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?

Page 6 of 18
 (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.

Page 7 of 18
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?

Page 8 of 18
 Aggregate Supply Price Real
(A) Curve Level Output
Shift to the Increas Increas
left e e

Aggregate Supply Price Real

Curve Level Output
(B)
Shift to the Increas No
left e change

Aggregate Supply Price Real

(C) Curve Level Output
Shift to the Increas Increas
right e e

Aggregate Supply Price Real

(D) Curve Level Output
Shift to the Decreas Increas
right e e

Aggregate Supply Price Real

(E) Curve Level Output
Shift to the Decreas Decreas
right e e

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

Page 9 of 18
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?

Page 10 of 18
 Outpu Price
(A) t Level
Decreas Decreas
e e

Outpu Price
(B) t Level
Decreas Increas
e e

Outpu Price
(C) t Level
Indetermina Increas
te e

Outpu Price
(D) t Level
Increas Indetermina
e te

Outpu Price
(E) t Level
Increas Increas
e e

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

Page 11 of 18
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?

Page 12 of 18
 Aggregate Aggregate
(A) Demand Supply
Not Decreas
change e

Aggregate Aggregate
(B) Demand Supply
Not Increas
change e

Aggregate Aggregate
(C) Demand Supply
Decreas Not
e change

Aggregate Aggregate
(D) Demand Supply
Decreas Increas
e e

Aggregate Aggregate
(E) Demand Supply
Increas Not
e 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.

Page 13 of 18
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?

Consumptio Real Gross Domestic

(A) n Product
Increas Increas
e e

Consumptio Real Gross Domestic

(B) n Product
Increas Decreas
e e

Consumptio Real Gross Domestic

(C) n Product
Decreas Increas
e e

Consumptio Real Gross Domestic

(D) n Product
Decreas Decreas
e e

Consumptio Real Gross Domestic

(E) n Product
No Increas
change e

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

Page 14 of 18
 (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 .

Page 15 of 18
AD-AS Model quiz

38. Based on the diagram above, which of the following describes the short-run equilibrium?
(A) The economy is operating at full employment.
(B) The economy is operating below full employment.
(C) The economy is operating above full employment.
(D) There will be downward pressure on the price level.
(E) There is a recessionary gap.

39. In the model, which of the following is true?

The economy is in an inflationary gap when the short-run equilibrium real output is below the long-run
(A)
equilibrium real output.
The economy is in an inflationary gap when the short-run equilibrium real output is at the long-run
(B)
equilibrium real output.
The economy is in a recessionary gap when the short-run equilibrium real output is at the long-run
(C)
equilibrium real output.
The economy is in a recessionary gap when the short-run equilibrium real output is below the long-run
(D)
equilibrium real output.
The economy is in a recessionary gap when the short-run equilibrium real output is above the long-run
(E)
equilibrium real output.

40. Which of the following is a reason why the aggregate demand curve is downward sloping?
(A) A higher price level decreases savings.
(B) A higher price level decreases interest rates.
(C) A higher price level increases exports.
(D) A higher price level decreases imports.
(E) A higher price level decreases real wealth.

Page 16 of 18
 ANSWER KEY FOR AD – AS MODEL MCQ

1. E 11. D 21. B 31. A

2. D 12. C 22. E 32. A
3. C 13. C 23. D 33. C
4. E 14. C 24. E 34. D
5. C 15. B 25. A 35. C
6. E 16. D 26. D 36. A
7. E 17. C 27. B 37. C
8. E 18. E 28. E 38. C
9. E 19. D 29. E 39. D
10. A 20. B 30. C 40. E

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