4.2.2.2 Aggregate demand and aggregate supply analysis Quiz: AQA Economics, Unit 2

The 20 questions

1. A change in the price level is shown on an AD/AS diagram as:

   • A shift of the long-run aggregate supply curve to the left, because higher prices reduce the productive capacity of firms.
   • A change in the slope of the short-run aggregate supply curve, which becomes steeper whenever the price level rises in the period.
   • A movement along the aggregate demand and aggregate supply curves, rather than a shift of either curve.
   • A shift of the aggregate demand curve to the right, because a higher price level always increases total spending in the economy.

2. Which of the following would shift the aggregate demand curve to the right?

   • An increase in the rate of income tax, which reduces disposable income and so reduces consumption at each price level.
   • A rise in imports of goods and services, which reduces net exports and so shifts the AD curve to the left in the economy.
   • An increase in government spending on infrastructure, which raises total planned expenditure at every price level.
   • A rise in the general price level, which moves the economy along the AD curve rather than shifting the curve at all.

3. Which of the following is a factor that shifts the short-run aggregate supply curve to the left?

   • A rise in money wage rates, which increases firms' production costs at every price level in the economy.
   • A cut in business taxation, which lowers costs and so shifts the short-run AS curve to the left in the economy.
   • An improvement in productivity, which reduces unit costs and so shifts the short-run AS curve to the left in the economy.
   • A fall in the cost of raw materials, which lowers production costs and so shifts the short-run AS curve to the left.

4. Which factor shifts the long-run aggregate supply curve to the right?

   • A rise in the general price level, which raises the output that firms are willing to supply in the long run in the economy.
   • An increase in the productive capacity of the economy, such as through technological progress or a rise in the labour force.
   • A rise in money wages, which increases the number of workers that firms wish to employ in the long run at each price level.
   • A rise in aggregate demand from higher government spending, which permanently increases the productive capacity of firms.

5. Underlying economic growth is represented on an AD/AS diagram as:

   • A movement along the short-run aggregate supply curve, reflecting a rise in the price level in the economy over time.
   • A rightward shift of the aggregate demand curve only, with no change to the long-run aggregate supply curve in the economy.
   • A leftward shift of the long-run aggregate supply curve, reflecting a fall in the number of workers in the economy.
   • A rightward shift of the long-run aggregate supply curve, reflecting an increase in the economy's productive capacity.

6. Which factor affects long-run aggregate supply but not short-run aggregate supply?

   • A change in raw material prices, which raises the costs of production firms face in the short run in the economy in the case described.
   • Technological progress, which raises the productive potential of the economy over time rather than only the costs of production.
   • A change in business taxation, which alters the costs of production firms face and so shifts the short-run curve.
   • A rise in money wage rates, which increases firms' costs of production and so affects short-run aggregate supply directly.

7. A demand-side shock that reduces aggregate demand is most likely to:

   • Leave the price level unchanged, because demand-side shocks affect only the long-run aggregate supply curve in the economy.
   • Increase both the price level and real output in the short run, because lower demand always raises the level of output.
   • Shift the long-run aggregate supply curve to the right, because lower demand always increases productive capacity in the economy.
   • Reduce both the price level and real output in the short run, moving the economy along the short-run aggregate supply curve.

8. A supply-side shock that raises production costs will, in the short run, most likely:

   • Reduce the price level and raise real output, as the short-run aggregate supply curve shifts to the right in the economy.
   • Raise the price level and reduce real output, as the short-run aggregate supply curve shifts to the left.
   • Leave both the price level and real output unchanged, because supply-side shocks affect only aggregate demand in the economy.
   • Shift the aggregate demand curve to the right, because higher costs always raise consumer spending in the economy.

9. Which of the following best describes macroeconomic equilibrium on an AD/AS diagram?

   • The point where the long-run and short-run aggregate supply curves are parallel, showing that prices and costs are unchanged.
   • The point where the aggregate demand curve meets the vertical axis, showing the price level at which output is zero in the case described.
   • The point where the aggregate demand and short-run aggregate supply curves intersect, giving the equilibrium price level and real output.
   • The point where the aggregate demand curve is steepest, showing the maximum level of output the economy can produce.

10. What is the effect of an increase in aggregate demand when the economy is at full employment, in the long run?

    • Mainly a rise in the price level, since output is constrained by the long-run aggregate supply curve in the economy.
    • A large rise in real output with no change in the price level, because the economy can always produce more in the long run.
    • A shift of the long-run aggregate supply curve to the left, because extra demand always reduces the productive capacity.
    • A fall in the price level, because higher demand always increases supply and so lowers prices in every economy.

11. Which evaluation best reflects the use of AD/AS analysis?

    • It helps illustrate the effects of shocks and policies, but it simplifies the economy and relies on assumptions about curve shapes.
    • It shows that governments can never affect output, because the AS curve is always vertical in every period of time in the case described.
    • It is useful only for measuring the level of unemployment, so it has no role in analysing prices or output in the economy.
    • It is a complete and exact model of the economy that predicts every outcome precisely, so its assumptions can be ignored.

12. A rise in consumer confidence shifts aggregate demand. What is the most likely effect in the short run?

    • Both the price level and real output fall, because confident consumers always save more and reduce their spending.
    • The price level and real output both rise, as the AD curve shifts right and the economy moves up the SRAS curve.
    • The price level falls and real output rises, because higher confidence always increases supply in every sector of the economy.
    • Neither the price level nor real output changes, because consumer confidence affects only the long-run aggregate supply curve.

13. Which factor shifts the aggregate demand curve to the left?

    • A rise in exports, which increases net exports and so shifts the aggregate demand curve to the right in the economy.
    • A rise in investment by firms in new equipment, which increases total planned expenditure at each price level in the economy.
    • A fall in the price level, which moves the economy along the aggregate demand curve rather than shifting the curve.
    • A fall in consumer spending caused by a rise in household debt repayments that reduces spending on goods and services.

14. Why does a fall in productivity shift the short-run aggregate supply curve to the left?

    • Lower productivity lowers unit costs of production, so firms supply more output at each price level in the economy.
    • Lower productivity increases the level of aggregate demand, so firms supply more output at each price level in the economy.
    • Lower productivity reduces the price level directly, so firms can supply a larger quantity of output in the short run.
    • Lower productivity raises unit costs of production, so firms supply less output at each price level in the economy.

15. Which of the following is a demand-side policy that could shift aggregate demand to the right?

    • A rise in the price of imported raw materials, which lowers production costs and so shifts aggregate demand to the right.
    • A cut in income tax, which raises households' disposable income and so increases consumption at each price level.
    • A rise in income tax, which reduces disposable income and so raises consumption at each price level in the economy.
    • A cut in government spending, which reduces planned expenditure and so shifts aggregate demand to the right in the economy.

16. An economy's long-run aggregate supply curve is vertical. What does this imply?

    • The economy can produce any level of output in the long run, so unemployment can always be eliminated by demand policy.
    • Prices in the long run are fixed by the government, so changes in aggregate demand never affect the price level at all.
    • Output in the long run is determined by aggregate demand alone, so supply-side factors have no effect on output in any period.
    • Output in the long run is determined by productive capacity, so changes in aggregate demand mainly affect the price level.

17. A government cuts business taxation. Which effect on the AD/AS diagram is most likely?

    • A leftward shift of the aggregate demand curve, as lower business taxation reduces the spending of firms on investment goods.
    • A rightward shift of the short-run aggregate supply curve, as lower costs allow firms to supply more output at each price level.
    • No change on the diagram, because business taxation has no effect on either aggregate demand or aggregate supply at all.
    • A leftward shift of the long-run aggregate supply curve, as lower taxation reduces the productive capacity of the economy.

18. Which of the following best explains why the short-run aggregate supply curve slopes upwards?

    • Higher prices raise firms' revenues relative to their costs, which encourages them to supply more output in the short run.
    • Higher prices always reduce the level of aggregate demand, so firms supply less output in the short run in every case.
    • Higher prices have no effect on firms' decisions, so the short-run supply curve is horizontal at all levels of output.
    • Higher prices reduce firms' revenues, which discourages them from supplying more output in the short run in the economy.

19. Which of the following shifts the long-run aggregate supply curve to the left?

    • A rise in the level of consumer spending, which increases the demand for goods and services produced within the economy.
    • A rise in the price of oil, which raises the production costs of firms for a limited period of time in the economy in the case described.
    • A permanent fall in the labour force, for example through emigration or retirement, which reduces the economy's productive potential.
    • A rise in the rate of interest, which reduces the cost of borrowing for firms seeking to invest in new productive capacity.

20. Which combination describes stagflation on an AD/AS diagram?

    • A rightward shift of the aggregate demand curve, which raises real output while the price level falls in the economy.
    • A rightward shift of the long-run aggregate supply curve, which lowers prices while raising output in the economy.
    • A leftward shift of the aggregate demand curve, which raises the price level while increasing real output in the economy.
    • A leftward shift of the short-run aggregate supply curve, which raises the price level while reducing real output.

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