AP Macroeconomics chapter practice15 questions

10 Short-Run and Long-Run Aggregate Supply

These questions come directly from the chapter practice in the book. Choose the best answer, check your reasoning, and use the explanation to correct any gap.

Question 1

Question 1 of 15

The overall price level rises while nominal input prices remain fixed under existing contracts. Which of the following occurs?

With input prices locked in by contract, a higher output price widens margins and firms produce more, which is a move along the curve they are already on. Choices B and C would each take a change in costs or in capacity, E has capacity responding to a nominal variable, and A moves the demand side rather than the supply side.
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D. The economy moves up short-run aggregate supply.

With input prices locked in by contract, a higher output price widens margins and firms produce more, which is a move along the curve they are already on. Choices B and C would each take a change in costs or in capacity, E has capacity responding to a nominal variable, and A moves the demand side rather than the supply side.

Question 2

Question 2 of 15

The world price of oil jumps sharply, and the economy in question imports all of its oil. In the short run,

Costlier energy raises production costs at every price level, so less output is profitable and the short-run curve moves left. Choice A reverses that direction, C treats a cost shock as a gain in capacity, and B and D relocate the demand side, which the oil price does not directly touch.
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E. short-run aggregate supply shifts left

Costlier energy raises production costs at every price level, so less output is profitable and the short-run curve moves left. Choice A reverses that direction, C treats a cost shock as a gain in capacity, and B and D relocate the demand side, which the oil price does not directly touch.

Question 3

Question 3 of 15

Stagflation names an uncomfortable pair of movements. Which of the following combinations does the term describe?

An adverse supply shift raises the price level while real output contracts, and that pair is what the word names. Choice B describes a favorable supply shift, C describes a demand expansion, D describes steady conditions, and E pairs falling prices with production at capacity.
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A. Rising prices and falling output

An adverse supply shift raises the price level while real output contracts, and that pair is what the word names. Choice B describes a favorable supply shift, C describes a demand expansion, D describes steady conditions, and E pairs falling prices with production at capacity.

Question 4

Question 4 of 15

To raise sustainable productive capacity rather than current spending, policy makers should look for

Lasting productivity gains raise what the same resources can produce, which is what moves potential output. Choices A and E change nominal variables and leave capacity alone, and C and D cut spending without adding to what the economy can make.
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B. a permanent improvement in productivity

Lasting productivity gains raise what the same resources can produce, which is what moves potential output. Choices A and E change nominal variables and leave capacity alone, and C and D cut spending without adding to what the economy can make.

Question 5

Question 5 of 15

Long-run aggregate supply is drawn as a vertical line at potential output. That shape reflects the proposition that in the long run

Given enough time, wages and other input prices adjust in full, so a higher price level leaves real capacity exactly where it was. Choice B states the short-run assumption instead, D hands real capacity to monetary policy, E overstates what potential output requires, and A rewrites the demand curve rather than the supply relationship.
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C. the price level does not determine real capacity

Given enough time, wages and other input prices adjust in full, so a higher price level leaves real capacity exactly where it was. Choice B states the short-run assumption instead, D hands real capacity to monetary policy, E overstates what potential output requires, and A rewrites the demand curve rather than the supply relationship.

Question 6

Question 6 of 15

Expected inflation rises and nominal wages are renegotiated in advance to reflect it. Short-run aggregate supply tends to

Wages negotiated at the higher expected rate raise costs at every current price level, so the curve contracts. Choice B reverses the cost effect, C turns a cost change into movement along the curve, D confuses the short-run curve with the long-run one, and E ties the shift to a demand movement the item never described.
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A. shift to the left

Wages negotiated at the higher expected rate raise costs at every current price level, so the curve contracts. Choice B reverses the cost effect, C turns a cost change into movement along the curve, D confuses the short-run curve with the long-run one, and E ties the shift to a demand movement the item never described.

Question 7

Question 7 of 15

Across an economy, nominal wages rise 4 percent in a year while labor productivity rises 4 percent as well. What happens to short-run aggregate supply?

Unit labor cost is the wage divided by output per worker, so wages and productivity climbing at the same rate leave the cost of a unit exactly where it was, and the curve drawn from those costs does not move. Choices A and B each read one input and stop, one seeing only the wage increase, the other only the productivity gain. C answers with the long-run curve, which this comparison never reaches, and E turns a wage rate into a horizontal distance the model never defines.
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D. Holds still, since unit costs are unchanged

Unit labor cost is the wage divided by output per worker, so wages and productivity climbing at the same rate leave the cost of a unit exactly where it was, and the curve drawn from those costs does not move. Choices A and B each read one input and stop, one seeing only the wage increase, the other only the productivity gain. C answers with the long-run curve, which this comparison never reaches, and E turns a wage rate into a horizontal distance the model never defines.

Question 8

Question 8 of 15

One supply curve can move while the other stays put. Which of the following shifts short-run aggregate supply and leaves long-run aggregate supply alone?

An interruption that ends raises current costs without touching what the economy can produce once it is over. Choices A, B, D, and E each add to resources, technology, or institutions, so every one of them moves long-run aggregate supply as well.
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C. A brief interruption of imported inputs

An interruption that ends raises current costs without touching what the economy can produce once it is over. Choices A, B, D, and E each add to resources, technology, or institutions, so every one of them moves long-run aggregate supply as well.

Question 9

Question 9 of 15

Potential output is the level of real production an economy can sustain. It is determined primarily by

Capacity comes from the quantity and quality of resources and from the technology available to use them. Choices A and D are nominal measures, B is a relative price, and C shapes current spending; none of the four changes what the economy is able to produce.
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E. available resources and technology

Capacity comes from the quantity and quality of resources and from the technology available to use them. Choices A and D are nominal measures, B is a relative price, and C shapes current spending; none of the four changes what the economy is able to produce.

Question 10

Question 10 of 15

A government reduces the per-unit taxes it levies on business production. What does that change tend to do?

Lower per-unit taxes cut the cost of producing each unit, so more output is profitable at every price level. Choice A reverses the direction, C treats a cost change as movement along the curve, D moves the demand side, and E confuses a cost saving with a loss of capacity.
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B. Shift short-run aggregate supply right

Lower per-unit taxes cut the cost of producing each unit, so more output is profitable at every price level. Choice A reverses the direction, C treats a cost change as movement along the curve, D moves the demand side, and E confuses a cost saving with a loss of capacity.

Question 11

Question 11 of 15

An adverse supply shock raises the price level and lowers output at once. Expansionary demand policy creates a tradeoff because it may

Extra demand can bring output back, but it pushes the price level higher still, and that is the bind the shock creates. Choice A claims both goals at once, C credits a demand policy with a capacity gain, D has expectations falling while demand rises, and E confuses movement along a curve with undoing the cost shock.
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B. support output while adding to inflation pressure

Extra demand can bring output back, but it pushes the price level higher still, and that is the bind the shock creates. Choice A claims both goals at once, C credits a demand policy with a capacity gain, D has expectations falling while demand rises, and E confuses movement along a curve with undoing the cost shock.

Question 12

Question 12 of 15

Both aggregate supply curves share a diagram with aggregate demand. Which of the following pairs labels its axes?

Aggregate demand and both supply curves are drawn with the price level on the vertical axis and real GDP on the horizontal one. Choice B belongs to the labor market, C to the Phillips curve, D to the money market, and E to the market for loanable funds.
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A. Price level and real GDP

Aggregate demand and both supply curves are drawn with the price level on the vertical axis and real GDP on the horizontal one. Choice B belongs to the labor market, C to the Phillips curve, D to the money market, and E to the market for loanable funds.

Question 13

Question 13 of 15

The economy's stock of productive capital increases while technology and the labor force are unchanged. What does that change most directly do?

More capital raises what the economy can turn out with its resources fully employed, so the long-run curve moves right. Choice A reverses the effect on capacity, B treats a capacity change as movement along a vertical line, C moves the demand side, and D confuses capacity with labor-market frictions.
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E. Shifts long-run aggregate supply right

More capital raises what the economy can turn out with its resources fully employed, so the long-run curve moves right. Choice A reverses the effect on capacity, B treats a capacity change as movement along a vertical line, C moves the demand side, and D confuses capacity with labor-market frictions.

Question 14

Question 14 of 15

Nominal wages are often set in advance. Which of the following features of short-run aggregate supply does that fact explain?

With wages fixed by contract, a higher price level widens margins and draws out more output, which is what gives the curve its positive slope. Choice A reverses the slope, B describes the long-run curve, D confuses a supply relationship with a monetary schedule, and E turns movement along the curve into a shift of it.
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C. It slopes upward to the right.

With wages fixed by contract, a higher price level widens margins and draws out more output, which is what gives the curve its positive slope. Choice A reverses the slope, B describes the long-run curve, D confuses a supply relationship with a monetary schedule, and E turns movement along the curve into a shift of it.

Question 15

Question 15 of 15

A leftward shift of short-run aggregate supply moves several variables at once. Which of the following pairs moves in opposite directions?

The shift raises the price level and cuts real output, so those two part company. Input costs and the price level rise together in choice A, wages follow the price level in B, output and employment fall together in C, and expectations and negotiated wages move together in E.
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D. The price level and real output

The shift raises the price level and cuts real output, so those two part company. Input costs and the price level rise together in choice A, wages follow the price level in B, output and employment fall together in C, and expectations and negotiated wages move together in E.

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