Q.1 Which of the following best defines Aggregate Demand (AD)?
Total quantity of goods and services supplied at different price levels
Total quantity of goods and services demanded at different price levels
Total income earned by factors of production
Total expenditure on imports
Explanation - Aggregate Demand represents the total demand for goods and services in an economy at various price levels.
Correct answer is: Total quantity of goods and services demanded at different price levels
Q.2 Which of the following is NOT a component of Aggregate Demand?
Consumption
Investment
Government Spending
Imports minus Exports
Explanation - Aggregate Demand = Consumption + Investment + Government Spending + Net Exports (Exports - Imports). Imports alone are not a component; they reduce net exports.
Correct answer is: Imports minus Exports
Q.3 An increase in which of the following will shift the Aggregate Demand curve to the right?
Interest rates
Government spending
Taxes
Wages
Explanation - Higher government spending increases overall demand, shifting the AD curve to the right.
Correct answer is: Government spending
Q.4 Which factor would NOT shift the Aggregate Supply (AS) curve?
Changes in resource prices
Changes in technology
Changes in government regulations
Changes in the price level
Explanation - Price level changes cause movements along the AS curve, not shifts. Shifts occur due to factors like resource prices, technology, or regulations.
Correct answer is: Changes in the price level
Q.5 What does the short-run Aggregate Supply (SRAS) curve typically slope upwards?
Because prices of inputs are flexible
Because output prices rise faster than input prices
Because there is no unemployment
Because technology is fixed
Explanation - In the short run, some input prices are sticky, so higher output prices increase profits, encouraging higher production.
Correct answer is: Because output prices rise faster than input prices
Q.6 A decrease in interest rates primarily affects which component of Aggregate Demand?
Consumption
Investment
Government Spending
Net Exports
Explanation - Lower interest rates reduce the cost of borrowing, encouraging firms to invest more in capital goods, increasing investment in AD.
Correct answer is: Investment
Q.7 If wages rise unexpectedly, what happens to the short-run Aggregate Supply curve?
It shifts right
It shifts left
It becomes steeper
No change
Explanation - Higher wages increase production costs, reducing supply at each price level, shifting the SRAS curve leftward.
Correct answer is: It shifts left
Q.8 Which scenario would cause the long-run Aggregate Supply (LRAS) to shift right?
A temporary tax cut
An increase in labor productivity
A rise in oil prices
A decrease in consumption
Explanation - LRAS depends on productive capacity. Higher productivity increases potential output, shifting LRAS right.
Correct answer is: An increase in labor productivity
Q.9 Which of the following represents the equilibrium in the AD-AS model?
Where AD intersects SRAS
Where AD intersects LRAS
Where SRAS intersects LRAS
Where AD intersects the horizontal axis
Explanation - Equilibrium output and price level in the short run are determined at the intersection of AD and SRAS curves.
Correct answer is: Where AD intersects SRAS
Q.10 Which type of inflation occurs when Aggregate Demand exceeds Aggregate Supply?
Cost-push inflation
Demand-pull inflation
Hyperinflation
Stagflation
Explanation - Demand-pull inflation occurs when excessive demand pushes the price level up.
Correct answer is: Demand-pull inflation
Q.11 Which factor would increase Aggregate Demand in an open economy?
Decrease in consumer confidence
Increase in net exports
Increase in taxes
Decrease in government spending
Explanation - Higher net exports increase total demand for domestically produced goods, shifting AD to the right.
Correct answer is: Increase in net exports
Q.12 Which of the following would shift the Aggregate Supply curve to the right?
Increase in production costs
Technological advancement
Decrease in labor force
Higher business taxes
Explanation - Better technology improves productivity, reducing costs and increasing supply at every price level.
Correct answer is: Technological advancement
Q.13 What does a leftward shift of the Aggregate Supply curve indicate?
Lower price levels
Higher output
Higher production costs
Increased consumer spending
Explanation - A leftward shift of AS typically indicates higher costs of production, reducing output at each price level.
Correct answer is: Higher production costs
Q.14 What happens to Aggregate Demand if households expect higher future incomes?
It decreases
It increases
It stays the same
It fluctuates randomly
Explanation - Expectations of higher future income encourage more current consumption, increasing AD.
Correct answer is: It increases
Q.15 Which of the following is a likely consequence of a leftward shift in AD?
Higher output
Lower price level
Increased employment
Demand-pull inflation
Explanation - A decrease in AD reduces both output and the price level, leading to lower equilibrium prices.
Correct answer is: Lower price level
Q.16 Which of the following is true about the intersection of AD and LRAS?
It determines short-run output
It determines long-run potential output
It is unaffected by changes in technology
It always occurs at zero unemployment
Explanation - The intersection of AD and LRAS shows the economy's long-run equilibrium at full employment and potential output.
Correct answer is: It determines long-run potential output
Q.17 Cost-push inflation is caused by:
Increase in Aggregate Demand
Increase in production costs
Increase in money supply
Decrease in government spending
Explanation - Cost-push inflation occurs when rising input costs (like wages or raw materials) shift AS left, raising the price level.
Correct answer is: Increase in production costs
Q.18 Which of the following policies can shift Aggregate Demand to the right?
Reducing government spending
Increasing taxes
Lowering interest rates
Reducing money supply
Explanation - Lower interest rates encourage investment and consumption, increasing AD.
Correct answer is: Lowering interest rates
Q.19 Which of the following would NOT increase Aggregate Supply?
Improved infrastructure
Higher wages
Better technology
Lower input prices
Explanation - Higher wages increase production costs, reducing supply, shifting AS left.
Correct answer is: Higher wages
Q.20 Stagflation occurs when:
AD rises rapidly
AS shifts right
AS shifts left while AD is stable
Government spending increases
Explanation - Stagflation is a combination of stagnant output (recession) and rising prices (inflation), typically caused by a leftward AS shift.
Correct answer is: AS shifts left while AD is stable
Q.21 Which factor would cause both Aggregate Demand and Aggregate Supply to increase?
Technological progress
Decrease in consumer confidence
Increase in production taxes
Rise in oil prices
Explanation - Technological improvements can reduce production costs (AS right) and increase investment/consumption (AD right).
Correct answer is: Technological progress
Q.22 What is the likely effect of a decrease in business taxes on the economy?
Decrease in Aggregate Supply
Increase in Aggregate Supply
Decrease in Aggregate Demand
No change
Explanation - Lower business taxes reduce production costs, increasing supply at each price level, shifting AS right.
Correct answer is: Increase in Aggregate Supply
Q.23 Which of the following describes the vertical long-run Aggregate Supply curve?
Output depends on the price level
Output is fixed at potential level
AD determines output
SRAS determines price level
Explanation - LRAS is vertical at potential GDP, indicating output is determined by resources and technology, not price level.
Correct answer is: Output is fixed at potential level
Q.24 Which event is most likely to shift Aggregate Demand to the left?
A rise in government spending
A decrease in consumer confidence
A decrease in taxes
An increase in exports
Explanation - Lower consumer confidence reduces spending, decreasing overall demand and shifting AD left.
Correct answer is: A decrease in consumer confidence
Q.25 Which of the following best explains the downward slope of the Aggregate Demand curve?
Higher prices increase consumption
Lower prices reduce real wealth
Lower prices increase real wealth and demand
Higher prices reduce exports
Explanation - As price levels fall, the real value of money rises, increasing consumption and overall demand, giving AD its downward slope.
Correct answer is: Lower prices increase real wealth and demand