Quiz on AD-AS Model: Shifts, Equilibrium, and Policy Impact

📚 Quick Study Guide

• 📈 Aggregate Demand (AD): Represents the total demand for goods and services in an economy at various price levels. Shifts are caused by changes in consumption, investment, government spending, and net exports.
• ⚙️ Aggregate Supply (AS): Represents the total supply of goods and services in an economy at various price levels. There are two types: Short-Run Aggregate Supply (SRAS) and Long-Run Aggregate Supply (LRAS).
• ⏳ Short-Run Aggregate Supply (SRAS): Upward sloping, influenced by input costs like wages and raw materials. Shifts are caused by changes in these costs, productivity, and supply shocks.
• 🏢 Long-Run Aggregate Supply (LRAS): Vertical, determined by the economy's potential output (full employment). Shifts are caused by changes in technology, resources, and institutions.
• ⚖️ Equilibrium: The intersection of AD and AS curves. Short-run equilibrium is where AD intersects SRAS. Long-run equilibrium is where AD intersects both SRAS and LRAS.
• 🧮 Fiscal Policy: Government spending and taxation policies used to influence aggregate demand. Expansionary fiscal policy (increased government spending or lower taxes) shifts AD to the right. Contractionary fiscal policy (decreased government spending or higher taxes) shifts AD to the left.
• 💰 Monetary Policy: Central bank actions to control the money supply and interest rates to influence aggregate demand. Expansionary monetary policy (lower interest rates or increased money supply) shifts AD to the right. Contractionary monetary policy (higher interest rates or decreased money supply) shifts AD to the left.
• 💥 Supply Shocks: Sudden events that shift the SRAS curve. Adverse supply shocks (e.g., oil price increases) shift SRAS to the left. Favorable supply shocks shift SRAS to the right.
• 🎯 Keynesian Economics: Emphasizes the role of aggregate demand in determining economic output and advocates for active government intervention to stabilize the economy.
• 🏛️ Classical Economics: Emphasizes the self-regulating nature of the economy and advocates for minimal government intervention.

🧪 Practice Quiz

1. Which of the following would cause a shift in the Aggregate Demand (AD) curve?
   1. A) A change in the price level
   2. B) An increase in government spending
   3. C) A change in the SRAS
   4. D) Technological Advancement
2. What does the Long-Run Aggregate Supply (LRAS) curve represent?
   1. A) The relationship between price level and quantity of goods supplied in the short run.
   2. B) The potential output of the economy at full employment.
   3. C) The total demand for goods and services in an economy.
   4. D) The effect of changes in import prices.
3. An increase in the price of oil, a key input in production, would most likely cause:
   1. A) A shift to the right in the AD curve.
   2. B) A shift to the left in the SRAS curve.
   3. C) A shift to the right in the LRAS curve.
   4. D) A shift to the left in the AD curve.
4. Expansionary monetary policy typically involves:
   1. A) Increasing interest rates and decreasing the money supply.
   2. B) Decreasing interest rates and increasing the money supply.
   3. C) Increasing government spending and decreasing taxes.
   4. D) Decreasing government spending and increasing taxes.
5. If the economy is in a recession, which fiscal policy action would be most appropriate according to Keynesian economics?
   1. A) Decreasing government spending
   2. B) Increasing taxes
   3. C) Increasing government spending
   4. D) Balancing the budget
6. What factor would cause the LRAS curve to shift to the right?
   1. A) A decrease in the money supply
   2. B) An increase in wages
   3. C) An increase in technology
   4. D) A decrease in government spending
7. In the AD-AS model, what is the short-run effect of a decrease in net exports?
   1. A) An increase in the price level and a decrease in real GDP.
   2. B) A decrease in the price level and an increase in real GDP.
   3. C) An increase in both the price level and real GDP.
   4. D) A decrease in both the price level and real GDP.