High School Economics Quiz: AD-AS Model, Inflationary & Recessionary Gaps

📚 Quick Study Guide

• 📈 The Aggregate Demand-Aggregate Supply (AD-AS) model illustrates the relationship between overall price levels and the quantity of goods and services demanded and supplied in an economy.
• ➡️ Aggregate Demand (AD) is the total demand for goods and services in an economy at a given price level and time period. It is represented by the equation: $AD = C + I + G + (X - M)$, where C = Consumption, I = Investment, G = Government Spending, X = Exports, and M = Imports.
• ⬅️ Aggregate Supply (AS) is the total supply of goods and services that firms in an economy plan to sell at a given price level during a specific time period. It can be short-run (SRAS) or long-run (LRAS).
• ⚖️ Equilibrium occurs where AD intersects with SRAS. The LRAS curve is vertical at the potential output level.
• 🔥 An Inflationary Gap exists when the equilibrium output exceeds the potential output, leading to rising price levels (inflation).
• 🧊 A Recessionary Gap exists when the equilibrium output is less than the potential output, leading to unemployment and potentially deflation.
• 🛠️ Policy tools to close these gaps include fiscal policy (government spending and taxation) and monetary policy (interest rates and money supply).

🧪 Practice Quiz

1. Which of the following best describes the Aggregate Demand (AD) curve?
   1. A) A curve showing the relationship between price level and quantity of goods and services demanded.
   2. B) A curve showing the relationship between price level and quantity of goods and services supplied.
   3. C) A vertical line representing potential output.
   4. D) A horizontal line representing the inflation rate.
2. What component is NOT a part of the Aggregate Demand equation?
   1. A) Consumption (C)
   2. B) Investment (I)
   3. C) Savings (S)
   4. D) Government Spending (G)
3. What does the Long-Run Aggregate Supply (LRAS) curve represent?
   1. A) The total supply of goods and services at a given price level in the short run.
   2. B) The potential output of the economy.
   3. C) The actual output of the economy.
   4. D) The minimum output of the economy.
4. An inflationary gap occurs when:
   1. A) Equilibrium output is less than potential output.
   2. B) Equilibrium output is equal to potential output.
   3. C) Equilibrium output is greater than potential output.
   4. D) Aggregate demand is less than aggregate supply.
5. Which of the following is a characteristic of a recessionary gap?
   1. A) High inflation
   2. B) Low unemployment
   3. C) Output exceeds potential output
   4. D) High unemployment
6. Which of the following fiscal policies would be most effective in closing a recessionary gap?
   1. A) Increasing taxes
   2. B) Decreasing government spending
   3. C) Increasing government spending
   4. D) Reducing the money supply
7. Which monetary policy is best suited to combat an inflationary gap?
   1. A) Decreasing interest rates
   2. B) Increasing the money supply
   3. C) Decreasing the money supply
   4. D) Lowering the reserve requirement