Module M07 Quiz: Aggregate Demand and Aggregate Supply
30 questions · Introductory · Mix of multiple choice, calculation, and short answer
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Attempt each question before clicking Show Answer. For calculation questions, write out your working before checking.
Question 1
Lesson L01 · Ad As
What does the intersection of the AD and AS curves represent?
Type: Multiple Choice
- A) Microeconomic equilibrium
- B) Macroeconomic equilibrium
- C) Fiscal balance
- D) Trade balance
Show Answer
Answer: B) Macroeconomic equilibrium
The intersection shows the price level and real GDP where total spending equals total production.
Question 2
Lesson L01 · Ad As
Name the four components of Aggregate Demand.
Type: Short Answer
Show Answer
Answer: Consumption (C), Investment (I), Government spending (G), Net Exports (NX)
AD = C + I + G + NX. These represent all sources of spending in the economy.
Question 3
Lesson L01 · Ad As
If consumption falls by $80 billion in an economy with an initial GDP of $2,000 billion, what is the new GDP?
Type: Calculation
Show Answer
Answer: 1920
$2,000b - $80b = $1,920 billion (ignoring multipliers for simplicity).
Question 4
Lesson L01 · Ad As
Why is the AD curve downward-sloping?
Type: Multiple Choice
- A) Due to substitution effects between goods
- B) Due to wealth, interest rate, and exchange rate effects
- C) Because lower prices increase supply
- D) Because of diminishing marginal utility
Show Answer
Answer: B) Due to wealth, interest rate, and exchange rate effects
The AD curve slopes down due to macro effects: real wealth, interest rates, and exchange rates — not micro substitution.
Question 5
Lesson L01 · Ad As
What is the key difference between AD-AS and regular supply-demand diagrams?
Type: Short Answer
Show Answer
Answer: AD-AS shows economy-wide price level and real GDP, while regular S-D shows price and quantity for one good.
The axes and reasons for the slopes are completely different between macro and micro diagrams.
Question 6
Lesson L02 · Ad As
If the price level falls, what happens to the real value of savings?
Type: Multiple Choice
- A) Increases
- B) Decreases
- C) Stays the same
- D) Depends on interest rates
Show Answer
Answer: A) Increases
A lower price level increases the purchasing power of nominal savings — the real wealth effect.
Question 7
Lesson L02 · Ad As
Through which effect does the RBA's cash rate influence AD?
Type: Short Answer
Show Answer
Answer: The interest rate effect: higher rates reduce borrowing and spending.
The cash rate transmits to mortgage and business loan rates, affecting investment and consumption.
Question 8
Lesson L02 · Exchange Rate
If Australia's price level rises 5% but trading partners' stay flat, what happens to net exports?
Type: Multiple Choice
- A) NX rises
- B) NX falls
- C) NX stays the same
- D) Only imports change
Show Answer
Answer: B) NX falls
Australian exports become more expensive and imports cheaper → NX falls.
Question 9
Lesson L02 · Inflation
Calculate the real value of $50,000 savings if the price level falls from 100 to 95.
Type: Calculation
Show Answer
Answer: 52631.58
Real value = $50,000 / 0.95 ≈ $52,631.58
Question 10
Lesson L02 · Ad As
Why doesn't micro substitution explain the AD curve's slope?
Type: Short Answer
Show Answer
Answer: Because AD involves the overall price level — there's no 'substitute economy' to switch to.
The downward slope comes from macro effects (wealth, interest rates, exchange rates), not substitution between goods.
Question 11
Lesson L03 · Fiscal Policy
How did JobKeeper shift AD during COVID-19?
Type: Short Answer
Show Answer
Answer: It maintained household incomes and consumption, shifting AD right.
JobKeeper's wage subsidies prevented a larger collapse in C and G.
Question 12
Lesson L03 · Exchange Rate
If the AUD depreciates from 0.75 USD to 0.65 USD, what happens to NX?
Type: Multiple Choice
- A) NX rises
- B) NX falls
- C) NX stays the same
- D) Only exports change
Show Answer
Answer: A) NX rises
A weaker AUD makes exports cheaper and imports dearer → NX rises.
Question 13
Lesson L03 · Ad As
Give one fiscal and one monetary policy tool that could shift AD right.
Type: Short Answer
Show Answer
Answer: Fiscal: Increase infrastructure spending. Monetary: Cut the cash rate.
Fiscal policy works through G or taxes; monetary policy works through interest rates affecting C and I.
Question 14
Lesson L03 · Monetary Policy
If the RBA raises the cash rate from 4.10% to 4.35%, which AD components are most affected?
Type: Multiple Choice
- A) C and I
- B) G and NX
- C) Only I
- D) Only C
Show Answer
Answer: A) C and I
Higher rates reduce consumption (C) by increasing mortgage costs and reduce investment (I) by raising borrowing costs.
Question 15
Lesson L03 · Ad As
Calculate the approximate AD shift if C falls by $15b and I falls by $10b (multiplier=2).
Type: Calculation
Show Answer
Answer: -50
Total initial shift = -\(25b. With multiplier: -\)25b × 2 = -$50b.
Question 16
Lesson L04 · Supply Shock
If oil prices spike, what happens to SRAS?
Type: Multiple Choice
- A) Shifts left
- B) Shifts right
- C) No change
- D) Becomes vertical
Show Answer
Answer: A) Shifts left
Higher input costs reduce firms' willingness to supply at every price level → SRAS shifts left.
Question 17
Lesson L04 · Labor Market
How does a minimum wage increase affect SRAS?
Type: Short Answer
Show Answer
Answer: It raises labour costs, shifting SRAS left.
Higher wages increase production costs, reducing supply at every price level.
Question 18
Lesson L04 · Ad As
If nominal wages are sticky, why does SRAS slope upward?
Type: Short Answer
Show Answer
Answer: Because when the price level rises but wages don't, real labor costs fall, making hiring more profitable.
Firms expand output when prices rise faster than wages in the short run.
Question 19
Lesson L04 · Inflation
Calculate real unit labor cost if wage=$80,000 and price level=110.
Type: Calculation
Show Answer
Answer: 727.27
Real unit labor cost = $80,000 / 110 ≈ $727.27 per index unit.
Question 20
Lesson L04 · Ad As
What makes SRAS upward-sloping rather than vertical?
Type: Multiple Choice
- A) Sticky wages
- B) Flexible prices
- C) Constant technology
- D) Fixed capital
Show Answer
Answer: A) Sticky wages
The key assumption is sticky nominal wages — if wages adjusted instantly, SRAS would be vertical.
Question 21
Lesson L05 · Ad As
Why is the LRAS curve vertical?
Type: Short Answer
Show Answer
Answer: Because in the long run, all prices including wages adjust fully, so output returns to potential (Y*) regardless of the price level.
The economy's productive capacity determines output in the long run, not the price level.
Question 22
Lesson L05 · Labor Market
How does an increase in skilled migration affect LRAS?
Type: Multiple Choice
- A) Shifts left
- B) Shifts right
- C) No effect
- D) Makes it upward-sloping
Show Answer
Answer: B) Shifts right
A larger labour force increases potential output (Y*) → LRAS shifts right.
Question 23
Lesson L05 · Ad As
Describe the self-correction for an inflationary gap.
Type: Short Answer
Show Answer
Answer: Tight labour markets push wages up, raising costs → SRAS shifts left until output returns to Y*.
Higher wages reduce firms' profit margins, decreasing supply until equilibrium is restored.
Question 24
Lesson L05 · Ad As
Calculate the recessionary gap if Y*=\(2,000b and Y=\)1,850b.
Type: Calculation
Show Answer
Answer: 150
Recessionary gap = Y* - Y = $2,000b - $1,850b = $150b.
Question 25
Lesson L05 · Ad As
Why might policymakers intervene rather than wait for self-correction?
Type: Multiple Choice
- A) Self-correction is too slow
- B) It always works perfectly
- C) Politicians prefer recessions
- D) Markets adjust instantly
Show Answer
Answer: A) Self-correction is too slow
Wage and price adjustments can take years — policy can accelerate recovery from recession.
Question 26
Lesson L06 · Ad As
How did COVID-19 affect both AD and SRAS?
Type: Short Answer
Show Answer
Answer: AD fell due to lockdowns reducing C, I, and NX. SRAS fell due to supply chain disruptions and border closures.
The pandemic was a rare double shock hitting both demand and supply simultaneously.
Question 27
Lesson L06 · Fiscal Policy
What was JobKeeper's approximate fiscal cost?
Type: Calculation
Show Answer
Answer: 70
JobKeeper cost approximately $70 billion in total.
Question 28
Lesson L06 · Monetary Policy
How did the RBA's 0.10% cash rate and QE support AD?
Type: Short Answer
Show Answer
Answer: Lower rates reduced borrowing costs, stimulating C and I. QE lowered long-term yields, supporting investment.
The RBA's actions offset some of the COVID-induced AD collapse.
Question 29
Lesson L06 · Ad As
Why was COVID-19 different from the GFC as a macroeconomic shock?
Type: Multiple Choice
- A) It was purely a demand shock
- B) It combined demand and supply shocks
- C) Only affected banks
- D) Had no policy response
Show Answer
Answer: B) It combined demand and supply shocks
COVID-19 uniquely disrupted both demand (lockdowns) and supply (production chains) simultaneously.
Question 30
Lesson L06 · Ad As
Calculate Australia's GDP fall in Q2 2020 from $2,050b to $1,850b.
Type: Calculation
Show Answer
Answer: 9.76
($2,050b - $1,850b) / $2,050b ≈ 9.76% (illustrative; actual was -7.0% quarterly).