Aggregate Supply Practice Questions

8 representative multiple-choice questions on aggregate supply for AP Macroeconomics, drawn from our 22-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 best explains why the short-run aggregate supply (SRAS) curve slopes upward?

   • A. Prices and wages both adjust instantly to market conditions
   • B. Nominal wages and input costs are sticky, so a higher price level increases real profit margins
   • C. The Federal Reserve controls the price level in the short run
   • D. Long-run economic growth boosts productivity
   Show answer

   Correct answer: B. Nominal wages and input costs are sticky, so a higher price level increases real profit margins

   SRAS slopes upward because wages and input costs are sticky in the short run. When the overall price level rises, firms get more revenue per unit but labor costs remain locked in via contracts and prior agreements. Real profit margins expand, so firms produce more. Option A contradicts the sticky wage theory that gives SRAS its slope. Option D describes what shifts LRAS over time, not what causes SRAS to slope upward.

2. 2. The long-run aggregate supply (LRAS) curve is vertical because:

   • A. Prices are always sticky in the long run
   • B. The economy's output depends on real factors like labor, capital, and technology, not on the price level
   • C. Workers always accept lower wages in the long run
   • D. The Federal Reserve targets a specific level of real GDP
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   Correct answer: B. The economy's output depends on real factors like labor, capital, and technology, not on the price level

   LRAS is vertical because long-run output depends entirely on real resources: the labor force, capital stock, and technology. Once wages and prices have fully adjusted, the price level no longer matters. If everything doubled overnight, the same workers would still show up with the same machines to produce the same output. Option A gets it backwards; in the long run, wages and prices are fully flexible, not sticky. Option C describes a specific adjustment process, not why LRAS is vertical.

3. 3. A major oil-producing nation faces a civil war that disrupts global oil production. In a country that imports most of its oil, what happens to SRAS and the price level in the short run?

   • A. SRAS shifts right, price level falls
   • B. SRAS shifts left, price level rises (stagflation potential)
   • C. SRAS does not shift because oil is an input, not a final good
   • D. SRAS shifts left, price level falls
   Show answer

   Correct answer: B. SRAS shifts left, price level rises (stagflation potential)

   Higher oil prices raise production costs for virtually every industry because oil touches transportation, manufacturing, agriculture, and chemicals. SRAS shifts left, output falls, and the price level rises. This is the classic stagflation scenario that the 1973 OPEC embargo produced. Option C is wrong because input costs absolutely affect SRAS: the whole point of the curve is how production costs influence total supply. Option D violates basic supply curve logic; a leftward SRAS shift raises prices, not lowers them.

4. 4. In the long run, if the economy is at an inflationary gap, the self-correcting mechanism predicts:

   • A. Wages rise, SRAS shifts left, output returns to potential GDP, and price level increases
   • B. Wages fall, SRAS shifts right, output increases beyond potential
   • C. Aggregate demand automatically decreases
   • D. The inflationary gap persists indefinitely without policy intervention
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   Correct answer: A. Wages rise, SRAS shifts left, output returns to potential GDP, and price level increases

   In an inflationary gap, the tight labor market drives wages up. Higher wages raise production costs, so SRAS shifts left. Output returns to potential GDP but the price level ends up permanently higher than it started. Option B has the wage movement backwards. Option D ignores the built-in correction mechanism that eventually closes the gap, even if policy intervention would speed things up.

5. 5. If the long-run aggregate supply (LRAS) curve shifts to the right due to increased capital investment, what is the expected long-run effect?

   • A. Potential GDP increases, and the price level decreases (assuming AD is unchanged)
   • B. Potential GDP decreases, and the price level increases
   • C. Only the price level changes, with no effect on output
   • D. The effect depends entirely on fiscal policy
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   Correct answer: A. Potential GDP increases, and the price level decreases (assuming AD is unchanged)

   A rightward LRAS shift increases potential GDP by expanding the economy's real productive capacity. With AD unchanged, the new long-run equilibrium features higher real output and a lower price level. This is exactly what happens during periods of sustained capital investment and productivity growth, like the U.S. experience from the late 1990s tech boom. Option B reverses the relationship completely. Option D misses the direct link between capacity and output in the AD/AS framework.

6. 6. The AP exam frequently asks about stagflation. Which combination of events would most clearly cause stagflation?

   • A. An increase in aggregate demand and productive capacity
   • B. A leftward shift of SRAS, combined with a stable or decreasing AD
   • C. A rightward shift of both SRAS and AD
   • D. A decrease in real GDP with a decrease in the price level
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   Correct answer: B. A leftward shift of SRAS, combined with a stable or decreasing AD

   Stagflation combines falling real GDP with rising prices. A leftward SRAS shift delivers both outcomes simultaneously: output drops and the price level rises. When AD is stable or falling at the same time, output falls further while prices still climb because of the supply shock. The 1973 oil embargo hit exactly this way. Option D describes a straightforward demand-driven recession, which is a different phenomenon.

7. 7. A sudden spike in the price of a key commodity like oil will cause:

   • A. A movement along SRAS
   • B. A leftward shift of SRAS
   • C. A rightward shift of LRAS
   • D. No change in SRAS
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   Correct answer: B. A leftward shift of SRAS

   An oil price shock is a supply shock — it raises input costs across the economy, shifting SRAS left. Output falls and the price level rises (stagflation). The 1973 OPEC embargo is the textbook case. A movement along SRAS would be caused by changes in the price level, not input prices.

8. 8. An economy is operating at a real GDP level below LRAS. Without policy intervention, what does self-correction predict?

   • A. Nominal wages and input prices will fall, shifting SRAS right until output returns to potential
   • B. LRAS will shift left to meet the lower level of real GDP
   • C. AD will automatically rise to restore full employment
   • D. The economy will stay in recession indefinitely
   Show answer

   Correct answer: A. Nominal wages and input prices will fall, shifting SRAS right until output returns to potential

   In a recessionary gap, unemployment is above the natural rate. Workers accept lower wages over time, reducing per-unit costs and shifting SRAS right. Output rises back to potential at a lower price level. Self-correction is real but SLOW — which is why Keynesians argue for active demand-side policy to speed up recovery.