Aggregate Demand & Supply Practice Questions

8 representative multiple-choice questions on aggregate demand & supply for AP Macroeconomics, drawn from our 15-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

1. 1. Which of the following would cause the aggregate demand curve to shift to the right?

   • A. An increase in interest rates by the Federal Reserve
   • B. A tax increase on personal income
   • C. An increase in consumer confidence
   • D. A decrease in government spending
   Show answer

   Correct answer: C. An increase in consumer confidence

   Rising consumer confidence pushes households to spend more, which boosts consumption (C) and shifts AD to the right. Every other option works against AD. Higher interest rates make borrowing more expensive, which depresses investment (I) and shifts AD left. A tax increase reduces disposable income and household spending. Cuts to government spending (G) directly lower AD.

2. 2. A negative supply shock, such as a sudden increase in oil prices, would:

   • A. Shift SRAS to the right, decreasing price level and increasing output
   • B. Shift SRAS to the left, increasing price level and decreasing output
   • C. Shift AD to the right
   • D. Shift LRAS to the left
   Show answer

   Correct answer: B. Shift SRAS to the left, increasing price level and decreasing output

   Oil is an input to nearly every industry, so when oil prices spike, production costs rise across the economy and the SRAS curve shifts left. Output falls and the price level rises, which is stagflation. The 1973 OPEC embargo is the classic case, and the 2022 inflation spike after the Russia-Ukraine war was another. Option A reverses the direction completely. Option D conflates a temporary cost shock with a permanent change in productive capacity, but short-term price disruptions don't shift LRAS.

3. 3. In the short run, if aggregate demand increases but the economy is already at full employment:

   • A. Real GDP will increase but prices will stay the same
   • B. Real GDP will stay the same and prices will fall
   • C. Both real GDP and prices will increase
   • D. Both real GDP and prices will fall
   Show answer

   Correct answer: C. Both real GDP and prices will increase

   Full employment means the economy is producing at or near potential GDP. Extra demand still produces some output gains as firms push workers to overtime and strain capacity, but with inputs constrained, prices rise substantially. The result is an inflationary gap with higher output AND higher prices in the short run. Option A would describe the horizontal Keynesian range, which applies only in a deep recession. In the long run, wages adjust up and SRAS shifts left, returning output to potential but leaving the price level permanently higher.

4. 4. Which of the following would shift the short-run aggregate supply (SRAS) curve to the right?

   • A. An increase in the minimum wage
   • B. A decrease in oil prices
   • C. Higher business taxes
   • D. A natural disaster destroying factories
   Show answer

   Correct answer: B. A decrease in oil prices

   Lower oil prices cut production costs across the economy, which means firms produce more at every price level. SRAS shifts right. Option A raises wages and pushes SRAS left. Option C adds to costs and also shifts SRAS left. Option D destroys productive capacity, which not only shifts SRAS left but also LRAS left because the capital stock has been permanently reduced. The key concept: anything that changes the cost of production shifts SRAS in the direction that matches the cost change.

5. 5. If the marginal propensity to consume (MPC) is 0.75 and government spending increases by $400 billion, the spending multiplier predicts a total change in real GDP of:

   • A. $400 billion
   • B. $1,600 billion
   • C. $1,200 billion
   • D. $800 billion
   Show answer

   Correct answer: B. $1,600 billion

   Spending multiplier = 1 / (1 - MPC) = 1 / (1 - 0.75) = 1 / 0.25 = 4. Total change in GDP = 4 × $400 billion = $1,600 billion. The $400B in new government spending becomes income for workers and contractors. They spend 75% ($300B), which becomes income for someone else. Each successive round gets smaller, but the cumulative effect is four times the initial spending. Option A ignores the multiplier entirely. Option C uses the tax multiplier (-MPC / (1 - MPC) = -3) which would apply to a tax cut, not government spending.

6. 6. In long-run equilibrium, the economy operates at the intersection of AD, SRAS, and LRAS. If AD shifts right in this situation, what happens in the long run?

   • A. Real GDP permanently increases above potential
   • B. The price level and real GDP both increase permanently
   • C. In the short run, output and prices rise; in the long run, wages adjust upward, SRAS shifts left, and output returns to potential with a higher price level
   • D. The price level decreases as firms compete for market share
   Show answer

   Correct answer: C. In the short run, output and prices rise; in the long run, wages adjust upward, SRAS shifts left, and output returns to potential with a higher price level

   Starting at long-run equilibrium, a rightward AD shift initially pushes the economy into an inflationary gap. Output and prices both rise in the short run. But the higher prices and tight labor market push wages up, which raises production costs and shifts SRAS left. The economy eventually returns to potential GDP, but at a permanently higher price level. This is the classical long-run outcome: demand-side shocks affect prices in the long run, not real output. Option A violates the vertical LRAS, because real GDP cannot exceed potential indefinitely. Option B misses the long-run self-correction through wage adjustment.

7. 7. Suppose MPC = 0.9 and the government increases taxes by $100 billion. What is the predicted change in aggregate demand?

   • A. A decrease of $100 billion
   • B. A decrease of $1,000 billion
   • C. A decrease of $900 billion
   • D. A decrease of $90 billion
   Show answer

   Correct answer: C. A decrease of $900 billion

   Tax multiplier = -MPC / (1 - MPC) = -0.9 / 0.1 = -9. Change in AD = -9 × $100B = -$900 billion. The tax increase takes $100B out of households, who would have spent 90% of it ($90B) in the first round. That $90B doesn't get spent, and each subsequent round removes another 90% of the previous round's lost spending. The tax multiplier is always one less in absolute value than the spending multiplier (which here is 10), because the first-round effect starts smaller. If the question had asked about a $100B spending increase with MPC = 0.9, the answer would have been $1,000B.

8. 8. An increase in the value of the US dollar against foreign currencies would most likely cause:

   • A. AD to shift right as exports become more competitive
   • B. AD to shift left as exports fall and imports rise, reducing net exports
   • C. SRAS to shift right
   • D. LRAS to shift left
   Show answer

   Correct answer: B. AD to shift left as exports fall and imports rise, reducing net exports

   A stronger dollar makes US goods more expensive for foreign buyers, which reduces exports (X). At the same time, foreign goods become cheaper for Americans, which increases imports (M). Net exports (X - M) fall, and because NX is a component of AD (C + I + G + NX), the AD curve shifts left. The 2022-2023 dollar strengthening cut US manufacturing exports while pulling in cheaper imports, which was a clear illustration of this channel. Option A reverses the relationship; a stronger dollar makes exports LESS competitive, not more.