Prepared by Alex

Dao

AGGREGATE DEMAND AND AGGREGATE

SUPPLY
PROBLEMS AND APPLICATIONS
PART 1: Multiple-choice question:
1. Most economists believe that neo-classical economic theory is a good description of the world in
a. the long run, but not in the short run.
b. the short run, but not in the long run.
c. the short run and in the long run.
d. neither the short nor long run.
2. The effect of an increase in the price level is represented by a
a. shift to the right of the aggregate demand curve.
b. shift to the left of the aggregate demand curve.
c. movement to the left along a given aggregate demand curve.
d. movement to the right along a given aggregate demand curve.
3. A decrease in U.S. interest rates leads to
a. an appreciation of the dollar that leads to smaller exports.
b. an appreciation of the dollar that leads to greater net exports.
c. a depreciation of the dollar that leads to smaller net exports.
d. a depreciation of the dollar that leads to greater net exports.
4. Suppose a stock market crash makes people feel poorer. This decrease in wealth would cause people to
a. decrease consumption, which shifts aggregate supply left.
b. decrease consumption, which shifts aggregate demand left.
c. increase consumption, which shifts aggregate supply right.
d. increase consumption, which shifts aggregate demand right.
5. Aggregate demand shifts right when the government
a. institutes an investment tax credit.
b. raises personal income taxes.
c. decreases the money supply.
d. All of the above are correct.
6. In the long run, technological progress
a. makes the price level rise, while increases in the money supply make prices fall.
b. makes the price level fall, while increases in the money supply make prices rise.
c. and increases in the money supply both make the price level rise.
d. and increases in the money supply both make the price level fall.

7. When the price level rises, other things the same, people want to
a. increase money holdings, so the interest rate increases.
b. increase money holdings, so the interest rate decreases.
c. reduce money holdings, so the interest rate increases.
d. reduce money holdings, so the interest rate decreases.
8. Which of the following tends to increase the quantity of output demanded when the price level
decreases?
a. the wealth effect
b. the interest rate effect
c. the exchange rate effect
d. All of the above are correct.
9. Which of the following shifts the long-run aggregate supply curve to the left?
a. an increase in the economys capital stock
b. an increase in the availability of natural resources from abroad
c. stricter environmental regulations
d. None of the above is correct.
10. An increase in the expected price level shifts aggregate
a. demand to the right.
b. demand to the left.
c. supply to the right.
d. supply to the left.
11. A change in price expectations will shift
a. short-run aggregate supply, but not long-run aggregate supply.
b. long-run aggregate supply, but not short-run aggregate supply.
c. both long-run aggregate supply and short-run aggregate supply.
d. long-run aggregate supply and aggregate demand.

PART 2: AD/AS Headlines Activity

This worksheet is all about diagram practice. Theres so much analysis tied up with economics diagrams
that its critical to be practicing them as if they were your ABCs or multiplication tables. In this exercise,
you are given several plausible headlines from the news. Your task is to create an appropriate diagram for
each. Be sure to use the appropriate notation and to demonstrate the change caused by the event.
1.Decades of Mexican immigration transforms the capacity United States economy.
2.Croatian house price drop for the third straight year.
3.Chinas trading partner Japan endures another 3 months of excellent GDP growth.
4.Colombias business leaders have low profit expectations for coming year.
5.Sustained investment in trade infrastructure has paid off for Singapore.
6.EU Times: New political crisis in the Middle East causes oil prices to soar.
7.Chinas loose monetary policy seen to influence big spending by consumers this New Year.

PART 3: Problems
Question 1: Explain 3 reasons why AD has the downwards shape?

Question 2: Explain how does AD shift in the following situation

a.
b.
c.
d.
e.

An increase in house price

Central Bank raises the basic interest rate
Deficit national debt
Home currency appreciate
Higher trade barriers

Question 3:

Question 4: Explain why LRAS is a vertical line?

Question 5: Explain why and draw diagrams:

a. SRAS curve is horizontal at levels of output below full employment
b. SRAS curve is vertical at levels of output beyond full employment

Question 6: Explain how does SRAS shift in the following situation:

a. Lower resource costs
b. Better infrastructure

c. Reduction in the minimum wage

d. Stronger currency
e. Higher business taxes

Question 7: Using AD/AS analysis, explain how a sharp oil price rise can lead to an increase
in the UK price level

Question 8: Use the AD/AS model for analyzing those cases:

a. Holding everything else constant, the real estate market collapses due to a housing
bubble.

b. Holding everything else constant, the stock market declines and this causes a
reduction in peoples wealth.
c. Holding everything else constant, uncertainty in European markets results in a loss of
consumer confidence.
d. Holding everything else constant, the government embarks on an austerity campaign
and reduces government spending.

Question 9*: Explain whether each of the following events will increase, decrease, or have
no effect on long-run aggregate supply. (you should use google for self-study the factor
change the LRAS, I will check you later)
a. The United States experiences a wave ofimmigration.
b. Congress raises the minimum wage to $10per hour.
c. Intel invents a new and more powerful computerchip.
d. A severe hurricane damages factories alongthe East Coast.

Question 10: Outline two reasons why the slowdown in the USA is likely to affect aggregate
demand in the UK.