Aggregate Demand and Short-Run Supply

Aggregate Demand and Short-Run Supply

1. 1. Which of the following correctly describes the AD curve and explains why it is downward-sloping?

   AD is downward-sloping because higher output reduces expected prices.AD is downward-sloping because higher prices reduce real money balances, raise interest rates, and reduce spending.AD is downward-sloping because firms' costs rise with output, forcing prices down.AD is downward-sloping because higher prices attract more foreign demand.

2. 2. In 2020, COVID lockdowns caused both output and inflation to fall sharply. Which type of shock does this represent, and why?

   A supply shock, because prices fell.A demand shock, because output and prices moved in the same direction.A supply shock, because the shock originated in the goods market.A demand shock, because lockdowns are exogenous to the firm.

3. 3. Which of the following would represent a supply shock in the AD-AS framework? Select all that apply.

   A rise in oil prices that increases production costs at every level of output.An increase in government spending that boosts aggregate demand.A spike in wage expectations that shifts SRAS up/left.A monetary expansion that increases the money supply.

4. 4. The 2022 energy spike after Russia's invasion of Ukraine caused output to slow while inflation accelerated. According to the AD-AS model diagnostic, what type of shock was this?

   A demand shock, because inflation accelerated.A supply shock, because output and inflation moved in opposite directions.A demand shock, because output fell.A supply shock that could have been offset by fiscal expansion.

5. 5. How do demand shocks and supply shocks differ in their policy implications?

   Demand shocks require supply-side reforms; supply shocks can be offset by monetary policy.Demand shocks are easy to respond to with monetary or fiscal policy; supply shocks are harder because expanding demand worsens inflation.Supply shocks are costless to manage; demand shocks require painful recessions.Both require the same policy response regardless of the shock's origin.