The Aggregate Demand Aggregate Supply Model(Economics ) Questions and Answers

Question 1. According to the model of aggregate supply and aggregate demand in the long run an increase in the money supply should cause ?
  1.    Prices to rise and output to rise
  2.    Price to fall and output to remain unchanged
  3.    Prices to fall and output to fall
  4.    prices to rise and output to remain unchanged
Explanation:-
Answer: Option D. -> prices to rise and output to remain unchanged
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 2. According to the interest rate effect aggregate demand slopes downward (negatively) because ?
  1.    lower prices increase money holdings decrease lending interest rates rise, and investment spending falls
  2.    lower prices increase the value of money holding and consumer spending increases
  3.    lower prices decrease the value of money holdings and consumers spending decreases
  4.    lower prices reduce money holdings increase lending interest rates fall, and investment spending increase
Explanation:-
Answer: Option D. -> lower prices reduce money holdings increase lending interest rates fall, and investment spending increase
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 3. Which of the following is not a reason why the aggregate demand curve slopes downward ?
  1.    The exchange-rate effect
  2.    The wealth effect
  3.    The classical dichotomy/monetary neutrality effect
  4.    The interest-rate effect
Explanation:-
Answer: Option C. -> The classical dichotomy/monetary neutrality effect
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 4. According to the wealth effect aggregate demand slopes downward (negatively) because ?
  1.    lower prices increase the value of money holding and consumers spending increase
  2.    lower prices decrease the value of money holding and consumers spending decrease
  3.    lower prices reduce money holding increase lending, interest rates fall and investment spending increase
  4.    lower prices increase money holding decrease lending, interest rates rise and investment spending falls
Explanation:-
Answer: Option A. -> lower prices increase the value of money holding and consumers spending increase
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 5. Stagflation occurs when the economy experiences ?
  1.    rising prices and rising output
  2.    rising prices and falling output
  3.    falling prices and falling output
  4.    falling prices and rising output
Explanation:-
Answer: Option B. -> rising prices and falling output
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 6. 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 ?
  1.    sticky-wage theory of the short-run aggregate supply curve
  2.    classical dichotomy theory of the short-run aggregate supply curve
  3.    misperceptions theory of the short-run aggregate supply curve
  4.    sticky-price theory of the short run aggregate supply curve
Explanation:-
Answer: Option A. -> sticky-wage theory of the short-run aggregate supply curve
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 7. 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 ?
  1.    Price rise; output falls
  2.    Price fall; output rises
  3.    Price rise; output rises
  4.    Price fall; output falls
Explanation:-
Answer: Option A. -> Price rise; output falls
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 8. 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 ?
  1.    Shift aggregate demand to the left
  2.    Shift short run aggregate supply to the left
  3.    shift aggregate demand to the right
  4.    shift short-run aggregate supply to the right
Explanation:-
Answer: Option C. -> shift aggregate demand to the right
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 9. 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 ?
  1.    Price fall; output rises
  2.    Price fall; output falls
  3.    Price rise; output fall
  4.    Price rise; output rise
Explanation:-
Answer: Option D. -> Price rise; output rise
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
Question 10. Policy makers are said to “accommodate” an adverse supply shock if they ?
  1.    fail to respond to the adverse supply shock and allow the economy to adjust on its own.
  2.    respond to the adverse supply shock by decreasing aggregate demand which lower prices
  3.    respond to the adverse supply shock by decreasing short run aggregate supply
  4.    respond to the adverse supply shock by increasing aggregate demand, which further raises prices
Explanation:-
Answer: Option D. -> respond to the adverse supply shock by increasing aggregate demand, which further raises prices
NO EXPLANATION IS AVAILABLE FOR THIS QUESTION!
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