AP Macro Exam Prep: Demand Shocks Q&A

📖 Quick Study Guide: Demand Shocks

• 📈 Definition: A demand shock is an unexpected event that suddenly increases or decreases the demand for goods and services in an economy.
• ➡️ Aggregate Demand (AD): Demand shocks directly impact the Aggregate Demand curve.
• ⬆️ Positive Demand Shock: An event that causes AD to increase (shift right). Examples: sudden increase in consumer confidence, tax cuts, increase in exports, unexpected boom in the stock market.
• ⬇️ Negative Demand Shock: An event that causes AD to decrease (shift left). Examples: sudden decrease in consumer confidence, tax hikes, decrease in exports, recession in major trading partners, financial crisis.
• 📊 Short-Run Effects: Shifts in AD lead to changes in price level and real GDP in the short run. A positive shock leads to higher price level and higher real GDP. A negative shock leads to lower price level and lower real GDP.
• 🔄 Long-Run Adjustment: In the long run, the economy adjusts back to its full employment output (Long-Run Aggregate Supply, LRAS) through changes in wages and input prices.
• ⚖️ Key Concept: Understanding the immediate shift of AD and the subsequent short-run equilibrium changes is crucial for AP Macro.

📝 Practice Quiz: Demand Shocks

1. Which of the following would most likely cause a a positive demand shock?
   A. A significant increase in the cost of raw materials.
   B. A decrease in government spending on infrastructure projects.
   C. A substantial increase in consumer confidence and expected future income.
   D. A new technology that significantly reduces production costs for many firms.
2. A negative demand shock will initially lead to:
   A. An increase in the price level and a decrease in real GDP.
   B. A decrease in the price level and an increase in real GDP.
   C. A decrease in the price level and a decrease in real GDP.
   D. An increase in the price level and an increase in real GDP.
3. If the Federal Reserve unexpectedly decreases interest rates, what is the most likely immediate effect on the aggregate demand curve?
   A. It will shift to the left, decreasing real GDP.
   B. It will shift to the right, increasing real GDP.
   C. It will become steeper, indicating less responsiveness to price changes.
   D. It will become flatter, indicating more responsiveness to price changes.
4. Which of the following scenarios describes a supply shock, not a demand shock?
   A. A sudden drop in consumer spending due to a recession.
   B. A sharp increase in oil prices due to geopolitical instability.
   C. An unexpected boom in the stock market, leading to increased household wealth.
   D. A government decision to significantly cut taxes for all households.
5. In the short run, a positive demand shock will cause the equilibrium price level and real GDP to:
   A. Both decrease.
   B. Both increase.
   C. Price level decrease, real GDP increase.
   D. Price level increase, real GDP decrease.
6. Which component of Aggregate Demand is most directly affected by a change in consumer confidence?
   A. Investment spending ($I$)
   B. Government spending ($G$)
   C. Net Exports ($NX$)
   D. Consumption spending ($C$)
7. An increase in personal income taxes would most likely cause the Aggregate Demand curve to:
   A. Shift right, increasing the price level.
   B. Shift left, decreasing the price level.
   C. Shift right, decreasing the price level.
   D. Shift left, increasing the price level.