MCQs on Aggregate Demand (AD) PDF

**MCQs on Aggregate Demand (AD) and the AD Curve** **1. Definition of Aggregate Demand** **1. What does aggregate demand (AD) represent in an economy?**\ A) The total supply of goods and services at different price levels\ B) The total spending on domestic goods and services at different price lev...

**MCQs on Aggregate Demand (AD) and the AD Curve** **1. Definition of Aggregate Demand** **1. What does aggregate demand (AD) represent in an economy?**\ A) The total supply of goods and services at different price levels\ B) The total spending on domestic goods and services at different price levels\ C) The total money supply in an economy\ D) The total revenue of all businesses in a given period ✅ **Correct Answer: B**\ *(AD is the total spending on real GDP in an economy at different price levels.)* **2. Components of Aggregate Demand** **2. Which of the following is NOT a component of aggregate demand?**\ A) Consumption (C)\ B) Government spending (G)\ C) Savings (S)\ D) Net exports (X - M) ✅ **Correct Answer: C**\ *(Savings is not part of AD; it represents money not spent in the economy.)* **3. Shape of the AD Curve** **3. Why is the aggregate demand curve downward sloping?**\ A) A higher price level increases consumer purchasing power\ B) A higher price level reduces real wealth, increasing demand\ C) A higher price level reduces purchasing power and net exports\ D) A higher price level always leads to more demand ✅ **Correct Answer: C**\ *(Higher price levels reduce purchasing power, decreasing consumption, investment, and net exports.)* **4. Movement vs. Shift in AD** **4. What causes a movement along the AD curve rather than a shift?**\ A) Changes in consumer confidence\ B) Changes in the price level\ C) Changes in interest rates\ D) Changes in government spending ✅ **Correct Answer: B**\ *(A movement along the AD curve is caused only by changes in the price level, while shifts occur due to changes in AD determinants.)* **5. Causes of AD Shifts -- Consumption (C)** **5. Which of the following will cause a rightward shift in the AD curve?**\ A) An increase in interest rates\ B) A fall in consumer confidence\ C) A decrease in income tax\ D) A decrease in wealth levels ✅ **Correct Answer: C**\ *(Lower income tax increases disposable income, boosting consumption and shifting AD to the right.)* **6. Causes of AD Shifts -- Investment (I)** **6. What is the likely effect of a significant increase in business confidence?**\ A) A decrease in investment spending, shifting AD to the left\ B) An increase in investment spending, shifting AD to the right\ C) A reduction in government spending, shifting AD to the left\ D) No effect on aggregate demand ✅ **Correct Answer: B**\ *(Higher business confidence leads to more investment, increasing AD.)* **7. Causes of AD Shifts -- Government Spending (G)** **7. Which of the following would shift AD to the left?**\ A) The government increases spending on infrastructure\ B) The central bank lowers interest rates\ C) The government cuts military spending\ D) Businesses expect strong economic growth ✅ **Correct Answer: C**\ *(A reduction in government spending decreases AD, shifting the curve leftward.)* **8. Causes of AD Shifts -- Net Exports (X - M)** **8. If the domestic currency depreciates, how does it affect AD?**\ A) Net exports increase, shifting AD to the right\ B) Net exports decrease, shifting AD to the left\ C) Consumption decreases, shifting AD to the left\ D) There is no effect on aggregate demand ✅ **Correct Answer: A**\ *(A weaker currency makes exports cheaper and imports more expensive, increasing net exports and shifting AD to the right.)* **9. National Income Abroad** **9. How would a recession in a major trading partner country affect domestic AD?**\ A) AD shifts to the right because imports increase\ B) AD shifts to the left because exports decrease\ C) AD shifts to the right because foreign income increases\ D) AD does not change since national income is not an AD factor ✅ **Correct Answer: B**\ *(If foreign income falls, demand for exports decreases, shifting AD leftward.)* **10. Interest Rates and AD** **10. If the central bank increases interest rates, what is the likely impact on AD?**\ A) AD shifts to the right as investment increases\ B) AD shifts to the left as borrowing becomes more expensive\ C) AD shifts to the right as government spending increases\ D) AD remains unchanged because interest rates do not affect AD ✅ **Correct Answer: B**\ *(Higher interest rates make borrowing expensive, reducing consumption and investment, shifting AD left.)* **11. The Effect of Inflation on AD** **11. If inflation in an economy rises significantly, how does it affect AD?**\ A) AD shifts right due to increased spending power\ B) AD shifts left as purchasing power declines\ C) AD remains the same since inflation does not affect demand\ D) AD shifts right due to higher business confidence ✅ **Correct Answer: B**\ *(Higher inflation erodes real incomes, reducing consumption and shifting AD left.)* **Bonus: Higher-Order Thinking MCQs** **12. Which policy would most effectively increase AD in a recession?** A\) Raising interest rates to attract foreign investment\ B) Increasing taxes to reduce the budget deficit\ C) Lowering interest rates and increasing government spending\ D) Imposing tariffs on imports ✅ **Correct Answer: C**\ *(Lower interest rates and higher government spending encourage consumption and investment, increasing AD.)* **13. If the government increases subsidies for businesses, what will likely happen to AD?** A\) AD will shift right as investment increases\ B) AD will shift left as business costs rise\ C) AD will not change as subsidies do not affect aggregate demand\ D) AD will shift left as government spending decreases ✅ **Correct Answer: A**\ *(Subsidies reduce costs for firms, encouraging investment and shifting AD right.)*