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AP Macroeconomics The Aggregate Demand/Aggregate Supply Model — practice questions

Explore 6 free The Aggregate Demand/Aggregate Supply Model questions in AP Macroeconomics Economics. Open each question or exercise to read its content, reference answers and available explanation.

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The Aggregate Demand/Aggregate Supply Model questions and exercises with answers

Showing questions 1–6 of 6.

John Maynard Keynes is associated with a law summarized in shorthand as which statement?Read the answer and worked solution →Over which time horizon does Keynes' law, that demand creates its own supply, apply fairly well?Read the answer and worked solution →Why does the aggregate supply curve slope upward?Read the answer and worked solution →In the AD/AS diagram, how is a recession illustrated?Read the answer and worked solution →During the 2007 to 2009 recession, the U.S. inflation rate fell from 3.8 percent in 2008 to what value in 2009?Read the answer and worked solution →Fix the aggregate demand slipRead the answer and worked solution →

Worked practice questions

John Maynard Keynes is associated with a law summarized in shorthand as which statement?

  1. Supply creates its own demand
  2. Government budgets must always balance
  3. Demand creates its own supply
  4. Prices are fixed regardless of costs
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Correct answer: C. Demand creates its own supply

1. Keynes' law is named for the economist John Maynard Keynes, who wrote during the Great Depression. 2. The law is shorthand for the idea that the level of total demand drives how much the economy actually produces. 3. In this view, demand is the driver and supply follows along, the reverse of Say's law. 4. Option A states Say's law instead, which is the opposing view. _Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.1 | Macroeconomic Perspectives on Demand and Supply_

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Over which time horizon does Keynes' law, that demand creates its own supply, apply fairly well?

  1. The long run of decades or more
  2. It never applies at any time horizon
  3. Only in centrally planned economies
  4. The short run of a few months to a few years
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Correct answer: D. The short run of a few months to a few years

1. Keynes developed his argument by looking at the Great Depression, a short-run collapse in demand. 2. In a recession or a boom lasting months to a couple of years, firms react mainly to how much demand they see. 3. Over that horizon, total demand strongly shapes how much output and employment the economy actually produces. 4. The long run is reserved for Say's law instead, so option A names the wrong horizon. _Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.1 | Macroeconomic Perspectives on Demand and Supply_

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Why does the aggregate supply curve slope upward?

  1. Because input costs always outrun output prices
  2. Because regulation requires more output at high prices
  3. Because buyers always want more when prices climb
  4. Higher output prices with fixed input costs reward extra output
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Correct answer: D. Higher output prices with fixed input costs reward extra output

1. The AS curve is built on the assumption that input prices, like wages, stay fixed while the output price level changes. 2. When the price firms receive for output rises but their costs do not, each unit sold becomes more profitable. 3. That extra profit incentive is what pulls a greater quantity of real GDP out of the economy. 4. Option D describes a demand-side idea, and it also contradicts the law of demand, so it is wrong on two counts. _Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.2 | Building a Model of Aggregate Demand and Aggregate Supply_

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More Economics topics

InflationMoney and BankingMeasuring Economic OutputUnemploymentMonetary Policy and Bank RegulationExchange Rates and International Capital FlowsGovernment Budgets and Fiscal PolicyAggregate Demand and Aggregate Supply