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Question 1 Which of the following is a shortcoming of the simple multiplier model that the AS-AD model overcomes? 1. The multiplier model ignores the fact that a rise in planned spending which causes a rise in output will also lead to a rise in incomes and the demand for money, and so in turn lead to a rise in the interest rate. 2. The multiplier model ignores the fact that a rise in injections leads to a rise in prices which will cause people to reduce their spending plans. ( a) Both 1 and 2 O b) 1 only c) 2 only O d) Neither 1 nor 2 Question 2 Which of the following arguments for a sloping AD curve is unconvincing? ( a) A rise in the price level in a country will tend to lead to a fall in the real value of exports and a rise in the real value of imports. "b) A rise in the price level in a country will lead to lower real spending because it will lead to lower real wealth. O c) A rise in the price level in a country will reduce the real value of firms' profits, causing them to reduce planned investment ( d) A rise in the price level in a country will lead to lower real spending because it will lead to a higher interest rate. Question 3 Which of the following will not cause a country's AD curve to shift left? a) A reduction in government transfers. b) An increase in VAT O c) A reduction in exports. O d) An increase in the price level. Question 4 Which of the following would lead to an upwards movement along a country's aggregate demand for labour curve, ADL? ( a) Prices and nominal wages both increase by 10%. () b) Prices rise by 10% while nominal wages increase by 5%. ( c) Prices rise by 5% while nominal wages increase by 10%. d) The real wage falls. Question 5 Suppose the real wage in a country is at the equilibrium level, but there is some natural unemployment. Which of the following does not help to explain this natural unemployment? O a) At the equilibrium wage, some people will prefer to care for their homes and families than have paid employment. b) At the equilibrium wage, some people who recently returned to the labour force after caring for young children will be unemployed while they wait for what they feel is the right job. O c) At the equilibrium wage, some people may be unemployed because the demand for their skills has fallen and there are no suitable jobs available. O d) At the equilibrium wage, some new graduates will be unemployed while they wait for what they feel is the right job.Question 6 Suppose that a country is in short-run equilibrium at the point where its aggregate demand curve intersects its aggregate supply curve. Then aggregate demand falls. Which of the following does not help to explain why output may then move to a lower short-run equilibrium level? a) Nominal wages may be sticky downwards. ( b) Prices may be sticky upwards. c) Individual producers may mistakenly believe that they alone have faced a fall in demand, and so may demand less labour. O d) Individual workers may mistakenly believe that while nominal wages have fallen, the price level has not. Question 7 Which of the following statements about a country's long-run aggregate supply curve, LAS, is true? a) It is vertical throughout its length at the output which would be produced if there were no unemployment. b) It is vertical throughout its length at the output which would be produced if there were only natural unemployment. O c) It slopes forwards at low price levels and is then vertical. O d) It slopes forwards at all price levels. Question 8 Suppose an economy is in short-run and long-run equilibrium where its AD, SAS, and LAS curves intersect. Then there is a demand shock and AD shifts to the right, Which of the following statements is false? a) In the short run unemployment will exceed the natural level. ( b) In the long run unemployment will equal the natural level. O c) In the short run the price level will increase. O d) In the long run, the price level will equal the original level. Question 9 Suppose an economy is in short-run and long-run equilibrium where its AD, SAS and LAS curves intersect. Then there is an improvement in technology which leads to a higher demand for labour, so increasing the level of natural employment and the level of potential output. Which of the following statements about the new long-run equilibrium position is false? O a) The new LAS curve will be to the right of the original LAS. O b) The price level will be lower than it started. O c) The real wage will be higher than it started. O d) The new SAS curve will be to the left of the original SAS. Question 10 Suppose an economy is in short-run and long-run equilibrium where its AD, SAS and LAS curves intersect. Then there is an increase in the price of imported inputs. Which of the following statements about the new long-run equilibrium position is false? O a) The new AD curve will be to the left of the original AD. b) The new SAS curve will be to the left of the original SAS. O c) The new LAS curve will be to the left of the original LAS. O d) The new aggregate demand for labour curve will be to the left of the original curve