Aggregate Models Flashcards
7 cards from real AP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Aggregate Models flashcards as text
In the AD-AS model, a negative supply shock (like a sudden rise in oil prices) will most likely cause:
Answer: Leftward shift of SRAS, higher price level, lower output
A negative supply shock increases production costs, shifting SRAS left, which raises the price level and reduces real GDP simultaneously (stagflation).
If the economy is operating above full employment (inflationary gap), which self-correcting mechanism will eventually restore long-run equilibrium without policy intervention?
Answer: Workers will demand higher wages, shifting SRAS leftward
In an inflationary gap, tight labor markets cause workers to negotiate higher wages, raising input costs and shifting SRAS left until output returns to potential.
The long-run aggregate supply (LRAS) curve is vertical because:
Answer: Real GDP is determined solely by available resources and technology, not price level
LRAS is vertical at potential GDP because long-run output depends on factor endowments and technology, not the nominal price level.
Which of the following shifts aggregate demand to the RIGHT?
Answer: A decrease in the interest rate by the central bank
Lower interest rates reduce the cost of borrowing, boosting consumer spending and business investment, which increases aggregate demand.
In the Keynesian cross model, the economy reaches equilibrium when:
Answer: Actual expenditure equals planned expenditure
Equilibrium in the Keynesian cross occurs where the planned expenditure line intersects the 45-degree line, meaning planned spending equals actual output.
An increase in the marginal propensity to consume (MPC) will:
Answer: Increase the spending multiplier and amplify the impact of fiscal policy
Since the multiplier = 1/(1-MPC), a higher MPC makes the denominator smaller, producing a larger multiplier that amplifies any initial change in spending.
Which scenario best represents a recessionary gap in the AD-AS model?
Answer: SRAS intersects AD to the left of LRAS, causing unemployment above the natural rate
A recessionary gap exists when the short-run equilibrium output falls below potential GDP, meaning cyclical unemployment exceeds zero.