Macroeconomics: Government Spending and Interest Rate Impacts Quiz

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20 Questions

What is the characteristic of the short run aggregate supply curve when the economy is in long run equilibrium?

It is vertical

Which of the following is an example of a positive demand shock?

The stock market crash of 1929

What will a positive supply shock lead to?

Stagflation

Which of the following is true when the economy is experiencing a recessionary gap?

Potential output is above aggregate output

What does the short run aggregate supply curve represent when it intersects the horizontal axis?

The quantity of aggregate output supplied is equal to the quantity demanded

Which type of shock resulted in the collapse of wealth and consumer confidence during the Great Depression?

Negative supply shock

What leads to an increase in the nominal wages and a reduction in the aggregate price level?

Production cost decrease

Which event is an example of a negative supply shock?

World oil supplies are disrupted

What characterizes the short run equilibrium aggregate output?

The aggregate demand curve and short run aggregate supply curve are identical

What will a positive supply shock lead to?

An increase in aggregate output along with inflation

What will occur if the federal government reduces defense spending?

Aggregate demand will decrease

What will occur if an increase in interest rate leads to a decrease in investment spending?

Aggregate demand will decrease

What will occur as a result of an increase in the aggregate price level?

Aggregate demand will decrease

What will occur if the price of steel decreases as a result of the discovery of new deposits of iron used to make steel?

Aggregate supply will increase

What do sticky nominal wages in the short run cause the short run aggregate supply to do?

Shift to the left

As a result of the wealth effect, a higher aggregate price level will reduce which of the following?

Household purchasing power

The interest rate effect of a decrease in the aggregate price level will increase which of the following?

Investment spending

Which type of shock leads to policy dilemmas due to the inability to use stabilization policy to address inflation and unemployment at the same time?

Negative supply shock

A higher aggregate price level leads to higher profit per unit output, an increase output in the short run, because of which of the following?

Productivity gains

If potential output is equal to actual aggregate output, which of the following is true?

None of the above

Test your understanding of the impacts of government spending reductions and interest rate increases on aggregate demand and aggregate supply in macroeconomics.

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