Master Macro Midterm: Test AD-AS & Inflation Skills

Question 1

Which of the following would cause a rightward shift of the Aggregate Demand (AD) curve?

Accepted Answer

An increase in government spending

Question 2

In the short run, a negative supply shock (e.g., a sudden increase in oil prices) will most likely cause:

Accepted Answer

Lower output and higher inflation

Question 3

According to the Phillips Curve in the short run, there is typically:

Accepted Answer

A negative relationship between inflation and unemployment

Question 4

If the Federal Reserve wants to decrease inflation during an overheating economy, it should:

Accepted Answer

Sell government bonds

Question 5

Suppose the required reserve ratio is 10%. If the Fed conducts an open market purchase of $200 million, what is the maximum potential change in the money supply? Round to 0 decimal places and express your answer in millions of dollars.

Accepted Answer

2000

Question 6

In the long run, if output is above potential GDP, we expect:

Accepted Answer

Unemployment to be below the natural rate and inflation to rise

Question 7

Explain step-by-step how an expansionary monetary policy shifts the AD curve and affects output and inflation in the short run.

Question 8

If expected inflation rises, what happens in the short-run Phillips Curve?

Accepted Answer

It shifts right

Question 9

If actual inflation is 6% and expected inflation was 2%, what likely happened to unemployment relative to the natural rate? Explain in 1–2 sentences.

Question 10

Using the AD-AS framework, explain how the economy self-corrects after a recessionary gap if the Fed does nothing.