AD/AS Analysis and Economic Growth: AD, SRAS, LRAS, Output Gaps, Actual Growth, Potential Growth, Supply-Side Growth

1. Aggregate demand is

A the total planned spending on domestic goods and services at different price levels
B the total output firms can produce at one fixed price only
C the total labour force available in an economy
D the total money saved by households only

2. Which formula correctly represents aggregate demand in an open economy?

A C + I + G + X – M
B C + S + T + M
C W + R + I + P
D GDP / population

3. Which component of aggregate demand is most directly affected by changes in disposable income?

A consumption
B exports
C imports only
D government spending only

4. Which is most likely to shift AD to the right?

A lower interest rates
B higher income tax
C lower consumer confidence
D lower export demand

5. Which is most likely to shift AD to the left?

A higher government spending
B lower interest rates
C higher consumer confidence
D higher income tax

6. A rise in exports will

A shift AD right
B shift AD left
C shift SRAS left
D leave AD unchanged always

7. A rise in imports, other things equal, will

A increase AD
B reduce AD
C increase LRAS
D reduce unemployment automatically

8. A fall in the exchange rate is most likely to increase AD because

A exports become cheaper and imports become dearer
B exports become dearer and imports become cheaper
C government spending must fall
D consumption must become zero

9. A rise in interest rates is most likely to reduce AD because

A borrowing becomes more expensive, reducing consumption and investment
B borrowing becomes cheaper, increasing consumption
C exports automatically rise
D imports become impossible

10. If consumer confidence rises, AD is likely to

A shift right
B shift left
C become vertical
D become perfectly elastic

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Short-run aggregate supply shows

A total output firms are willing to supply at different price levels when some costs are fixed
B total spending by households only
C the maximum possible output at full employment only
D imports minus exports

12. SRAS slopes upward mainly because

A higher price levels can make production more profitable when some costs are sticky
B all costs rise immediately with prices
C output cannot change in the short run
D firms never respond to prices

13. Which is most likely to shift SRAS to the right?

A lower wage costs
B higher oil prices
C higher indirect taxes
D lower productivity

14. Which is most likely to shift SRAS to the left?

A higher raw material costs
B lower unit labour costs
C improved productivity
D lower import prices for inputs

15. A rise in oil prices is most likely to cause

A SRAS to shift left
B SRAS to shift right
C AD to shift right directly
D LRAS to become horizontal

16. A fall in indirect taxes on firms is likely to

A shift SRAS right
B shift SRAS left
C reduce productive capacity
D reduce output at every price level

17. Improved labour productivity is likely to

A shift SRAS right
B shift SRAS left
C reduce output possibilities
D increase unit costs

18. A depreciation may shift SRAS left if

A imported raw materials become more expensive
B exports become cheaper
C imports become cheaper
D foreign demand falls automatically

19. Long-run aggregate supply shows

A the economy’s productive potential when all resources are fully adjusted
B only household consumption
C only government spending
D the level of imports at one exchange rate

20. The classical LRAS curve is usually drawn as

A vertical at full-employment output
B horizontal at all price levels
C downward sloping
D identical to AD

21. LRAS shifts right when

A productive capacity increases
B aggregate demand falls
C inflation rises without output change
D imports rise because consumers prefer foreign goods

22. Which is most likely to shift LRAS right?

A better education and training
B higher corporation tax reducing investment incentives
C destruction of infrastructure
D lower labour force participation

23. Which is most likely to shift LRAS left?

A war damaging capital stock
B technological progress
C immigration of skilled workers
D improved infrastructure

24. Supply-side growth is best shown by

A LRAS shifting right
B AD shifting left
C SRAS shifting left only
D price level rising with no output change

25. Actual economic growth means

A an increase in real GDP
B an increase in productive potential only
C a rise in nominal GDP caused only by inflation
D a fall in unemployment without output change

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Potential economic growth means

A an increase in the economy’s productive capacity
B a short-run rise in spending only
C a fall in the price level only
D a rise in imports only

27. Which change shows actual growth without potential growth?

A AD rises and real output rises within spare capacity
B LRAS shifts right because productivity improves
C capital stock increases permanently
D labour force skills improve

28. Which change shows potential growth?

A increase in quantity or quality of factors of production
B higher consumption caused by temporary borrowing
C higher price level with unchanged real output
D lower saving and lower investment

29. Economic growth caused by higher AD alone may be unsustainable if

A the economy reaches full capacity and inflation rises
B LRAS shifts right faster than AD
C productivity rises continuously
D spare capacity increases forever

30. Economic growth caused by higher LRAS is likely to be more sustainable because

A productive capacity increases
B only prices rise
C imports must fall to zero
D unemployment must rise permanently

31. A positive output gap occurs when

A actual output is above potential output
B actual output is below potential output
C unemployment is above its natural rate with spare capacity
D AD is too low for full employment

32. A negative output gap occurs when

A actual output is below potential output
B actual output is above potential output
C inflationary pressure is always maximum
D the economy is beyond full capacity

33. A positive output gap is most likely to create

A inflationary pressure
B deflationary pressure
C falling wage pressure
D lower capacity utilisation

34. A negative output gap is most likely to create

A unemployment and downward pressure on inflation
B excess demand and rising inflation
C labour shortages
D demand-pull inflation only

35. If AD increases when the economy has large spare capacity, the main effect is likely to be

A higher real output with limited inflation
B much higher price level only
C lower real GDP
D LRAS shifting left

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. If AD increases when the economy is already near full employment, the main effect is likely to be

A higher inflation with limited output gain
B lower price level
C lower employment
D SRAS shifting right automatically

37. If SRAS shifts left while AD is unchanged, the likely result is

A higher price level and lower real output
B lower price level and higher real output
C lower price level and lower unemployment
D higher real output with no inflation

38. If SRAS shifts right while AD is unchanged, the likely result is

A lower price level and higher real output
B higher price level and lower real output
C higher inflation and higher unemployment
D no change in equilibrium

39. If LRAS shifts right and AD also shifts right by a similar amount, the economy may experience

A higher real output with stable inflation
B lower real output and higher inflation
C falling productive capacity
D stagflation necessarily

40. Stagflation can be shown by

A SRAS shifting left, causing higher inflation and lower output
B AD shifting right, causing higher output and inflation
C LRAS shifting right, causing lower prices and higher output
D AD shifting left, causing lower prices and lower output

41. Which policy is most likely to increase LRAS?

A investment in infrastructure and education
B higher income tax reducing disposable income
C cuts in government capital spending
D higher interest rates reducing investment

42. Which policy is most likely to reduce AD?

A contractionary fiscal policy
B lower interest rates
C higher government spending
D lower income tax

43. Which policy is most likely to increase AD?

A expansionary monetary policy
B higher interest rates
C higher income tax
D lower government spending

44. A cut in interest rates may increase economic growth in the short run by

A increasing consumption and investment
B reducing borrowing
C lowering aggregate demand
D reducing exports directly

45. A cut in income tax may increase AD because

A disposable income rises, increasing consumption
B disposable income falls, reducing consumption
C firms’ unit costs rise immediately
D imports must fall

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

46. A supply-side policy is most likely to reduce inflationary pressure in the long run if it

A increases productive capacity
B reduces LRAS
C increases unit costs
D reduces labour productivity

47. Which policy is most likely to improve both growth and inflation performance?

A improving productivity through training and technology
B increasing indirect taxes on production
C reducing investment in infrastructure
D discouraging enterprise

48. Which is a possible cost of rapid economic growth?

A environmental damage and inflationary pressure
B lower employment always
C lower living standards always
D falling government tax revenue always

49. Which chain is most accurate for demand-side growth near full employment?

A AD rises → economy reaches capacity → output rises little → price level rises significantly
B AD rises → LRAS shifts left → inflation disappears
C AD falls → output rises → unemployment falls
D AD rises → imports fall to zero → inflation impossible

50. Which chain is most accurate for supply-side growth?

A investment in education/technology → productivity rises → LRAS shifts right → potential output rises
B higher oil prices → SRAS shifts right → output rises and inflation falls
C higher income tax → consumption rises → AD shifts right → potential output rises automatically
D lower productivity → LRAS shifts right → real GDP rises sustainably

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: A

A correct: aggregate demand is total planned spending on domestic output at different price levels.
B wrong: this describes aggregate supply/output, not demand.
C wrong: labour force is labour supply.
D wrong: household saving is a withdrawal, not AD.

2. Answer: A

A correct: open-economy AD = C + I + G + X – M.
B wrong: S, T and M are withdrawals.
C wrong: W, R, I and P are income categories.
D wrong: GDP/population is GDP per head.

3. Answer: A

A correct: disposable income directly affects household consumption.
B wrong: exports are affected more by foreign income, exchange rates and competitiveness.
C wrong: imports may rise with income, but consumption is the direct AD component.
D wrong: government spending is decided by government policy.

4. Answer: A

A correct: lower interest rates reduce borrowing costs, increasing consumption and investment.
B wrong: higher income tax reduces disposable income and shifts AD left.
C wrong: lower confidence reduces consumption/investment.
D wrong: lower export demand reduces AD.

5. Answer: D

A wrong: higher government spending increases AD.
B wrong: lower interest rates increase AD.
C wrong: higher confidence increases consumption and investment.
D correct: higher income tax reduces disposable income and consumption, shifting AD left.

6. Answer: A

A correct: exports are an injection and part of AD, so higher exports shift AD right.
B wrong: AD does not fall when exports rise.
C wrong: exports affect demand, not SRAS directly.
D wrong: AD changes.

7. Answer: B

A wrong: imports are subtracted from AD.
B correct: higher imports mean more spending leaks abroad, reducing AD.
C wrong: imports do not automatically increase productive capacity.
D wrong: unemployment does not automatically fall.

8. Answer: A

A correct: depreciation makes exports cheaper to foreigners and imports dearer, increasing net exports and AD.
B wrong: that describes appreciation.
C wrong: government spending does not have to fall.
D wrong: consumption does not become zero.

9. Answer: A

A correct: higher interest rates discourage borrowing and spending by households/firms.
B wrong: borrowing becomes more expensive, not cheaper.
C wrong: exports do not automatically rise.
D wrong: imports do not become impossible.

10. Answer: A

A correct: higher confidence increases planned consumption and investment, shifting AD right.
B wrong: confidence rise does not shift AD left.
C wrong: AD does not become vertical.
D wrong: AD does not become perfectly elastic.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: A

A correct: SRAS shows output firms are willing to supply at each price level in the short run when some costs are fixed/sticky.
B wrong: household spending is consumption.
C wrong: maximum full-employment output is closer to LRAS.
D wrong: imports minus exports is trade data.

12. Answer: A

A correct: when some costs are sticky, higher prices raise profits, encouraging firms to supply more.
B wrong: if all costs rose immediately with prices, output response would be weaker.
C wrong: output can change in the short run.
D wrong: firms respond to prices.

13. Answer: A

A correct: lower wage costs reduce unit costs, allowing more output at each price level.
B wrong: higher oil prices raise costs and shift SRAS left.
C wrong: higher indirect taxes raise costs and shift SRAS left.
D wrong: lower productivity raises unit costs and shifts SRAS left.

14. Answer: A

A correct: higher raw material costs raise production costs, shifting SRAS left.
B wrong: lower unit labour costs shift SRAS right.
C wrong: improved productivity shifts SRAS right.
D wrong: lower input import prices shift SRAS right.

15. Answer: A

A correct: oil is a key input, so higher oil prices increase costs and reduce SRAS.
B wrong: SRAS shifts left, not right.
C wrong: higher oil prices are a supply shock, not a direct AD increase.
D wrong: LRAS does not become horizontal.

16. Answer: A

A correct: lower indirect taxes reduce firms’ costs, shifting SRAS right.
B wrong: costs fall, so SRAS does not shift left.
C wrong: productive capacity is not reduced.
D wrong: output at each price level rises, not falls.

17. Answer: A

A correct: productivity improvement lowers unit costs and increases output firms can supply.
B wrong: productivity does not reduce SRAS.
C wrong: output possibilities rise.
D wrong: unit costs fall.

18. Answer: A

A correct: depreciation raises the domestic cost of imported inputs, increasing costs and shifting SRAS left.
B wrong: cheaper exports affect AD, not the cost-push SRAS effect.
C wrong: depreciation makes imports dearer.
D wrong: foreign demand does not automatically fall.

19. Answer: A

A correct: LRAS represents the economy’s productive potential when wages/prices and resources have adjusted.
B wrong: consumption is a component of AD.
C wrong: government spending is a component of AD.
D wrong: imports are not LRAS.

20. Answer: A

A correct: the classical LRAS is vertical at full-employment/potential output.
B wrong: horizontal LRAS is Keynesian extreme/spare capacity idea, not classical.
C wrong: LRAS is not downward sloping.
D wrong: LRAS is not identical to AD.

21. Answer: A

A correct: LRAS shifts right when productive capacity rises.
B wrong: lower AD affects actual output, not productive potential directly.
C wrong: inflation alone does not raise LRAS.
D wrong: import preference does not necessarily increase capacity.

22. Answer: A

A correct: education and training improve human capital and potential output.
B wrong: lower investment incentives can reduce LRAS growth.
C wrong: destroyed infrastructure reduces productive capacity.
D wrong: lower labour force participation reduces labour supply.

23. Answer: A

A correct: war damage reduces capital stock and productive capacity, shifting LRAS left.
B wrong: technology shifts LRAS right.
C wrong: skilled immigration shifts LRAS right.
D wrong: infrastructure improvement shifts LRAS right.

24. Answer: A

A correct: supply-side growth means productive capacity rises, shown by LRAS shifting right.
B wrong: AD shifting left reduces demand.
C wrong: SRAS shifting left is a negative supply shock.
D wrong: price rise alone is inflation, not supply-side growth.

25. Answer: A

A correct: actual growth means real GDP increases.
B wrong: productive potential only is potential growth.
C wrong: nominal GDP can rise due to inflation without real growth.
D wrong: unemployment can fall without necessarily defining growth.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: potential growth is an increase in the economy’s productive capacity/LRAS.
B wrong: short-run spending rise is demand-side actual growth.
C wrong: lower price level is not potential growth.
D wrong: imports rising is trade behaviour.

27. Answer: A

A correct: AD can raise real output in the short run when spare capacity exists, without increasing LRAS.
B wrong: LRAS shifting right is potential growth.
C wrong: more capital stock raises productive capacity.
D wrong: improved skills raise productive capacity.

28. Answer: A

A correct: better or more factors of production increase potential output.
B wrong: temporary borrowing raises demand, not capacity.
C wrong: higher prices with unchanged output is inflation.
D wrong: lower saving/investment can weaken capacity growth.

29. Answer: A

A correct: if AD keeps rising near capacity, output cannot rise much and inflation accelerates.
B wrong: if LRAS shifts right faster, growth is more sustainable.
C wrong: productivity growth supports sustainability.
D wrong: spare capacity cannot increase forever from AD growth alone.

30. Answer: A

A correct: LRAS growth increases capacity, allowing more output without the same inflationary pressure.
B wrong: supply-side growth is not only price rise.
C wrong: imports do not have to fall to zero.
D wrong: unemployment does not have to rise permanently.

31. Answer: A

A correct: positive output gap means actual GDP is above potential GDP.
B wrong: this is a negative output gap.
C wrong: spare capacity is linked to negative output gap.
D wrong: low AD is linked to negative output gap.

32. Answer: A

A correct: negative output gap means actual output is below potential output.
B wrong: this is positive output gap.
C wrong: inflation pressure is usually weak, not maximum.
D wrong: beyond full capacity means positive output gap.

33. Answer: A

A correct: output above potential creates pressure on wages, resources and prices.
B wrong: deflationary pressure is linked to weak demand/spare capacity.
C wrong: wage pressure rises, not falls.
D wrong: capacity utilisation is high.

34. Answer: A

A correct: negative output gap means spare capacity, unemployment and weaker inflation pressure.
B wrong: excess demand occurs with positive output gap.
C wrong: labour shortages are more likely with positive output gap.
D wrong: demand-pull inflation is unlikely when demand is weak.

35. Answer: A

A correct: with spare capacity, firms can raise output without large cost/price rises.
B wrong: price level only rises sharply mainly near full capacity.
C wrong: higher AD raises, not lowers, real GDP.
D wrong: AD change does not shift LRAS left.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

36. Answer: A

A correct: near full employment, higher AD mainly bids up prices because spare resources are limited.
B wrong: price level does not fall.
C wrong: employment is unlikely to fall from higher AD.
D wrong: SRAS does not automatically shift right.

37. Answer: A

A correct: SRAS left means higher costs, lower output and higher price level.
B wrong: that describes SRAS right.
C wrong: unemployment rises, not falls.
D wrong: output falls and inflation rises.

38. Answer: A

A correct: SRAS right means lower costs/productivity gains, raising output and lowering price level.
B wrong: that describes SRAS left.
C wrong: inflation and unemployment do not both rise.
D wrong: equilibrium changes.

39. Answer: A

A correct: if AD and LRAS rise together, output can increase while inflation remains more stable.
B wrong: output does not fall if capacity and demand rise.
C wrong: LRAS right means capacity rises.
D wrong: stagflation is not necessary.

40. Answer: A

A correct: stagflation is rising inflation with falling output, often from SRAS shifting left.
B wrong: AD right raises output and inflation, not stagflation.
C wrong: LRAS right improves output and reduces inflation pressure.
D wrong: AD left lowers output and price level/inflation, not stagflation.

41. Answer: A

A correct: infrastructure and education raise productivity and productive capacity.
B wrong: higher income tax mainly reduces AD/incentives.
C wrong: cutting capital spending weakens capacity.
D wrong: higher interest rates can reduce investment.

42. Answer: A

A correct: contractionary fiscal policy means higher taxes/lower government spending, reducing AD.
B wrong: lower interest rates increase AD.
C wrong: higher government spending increases AD.
D wrong: lower income tax increases disposable income and AD.

43. Answer: A

A correct: expansionary monetary policy lowers interest rates/increases credit, raising AD.
B wrong: higher rates reduce AD.
C wrong: higher taxes reduce AD.
D wrong: lower government spending reduces AD.

44. Answer: A

A correct: lower interest rates encourage borrowing, consumption and investment, raising AD and short-run growth.
B wrong: borrowing increases, not reduces.
C wrong: AD rises, not falls.
D wrong: exports are not directly reduced.

45. Answer: A

A correct: lower income tax raises disposable income, increasing consumption and AD.
B wrong: disposable income rises, not falls.
C wrong: income tax cuts do not immediately raise firms’ unit costs.
D wrong: imports may rise with consumption.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

46. Answer: A

A correct: higher productive capacity reduces pressure on scarce resources and helps contain inflation.
B wrong: lower LRAS increases inflationary pressure.
C wrong: higher unit costs increase inflation.
D wrong: lower productivity reduces capacity and raises costs.

47. Answer: A

A correct: productivity improvements raise LRAS, supporting growth and reducing inflationary pressure.
B wrong: higher indirect taxes raise costs and inflation.
C wrong: less infrastructure investment weakens LRAS.
D wrong: discouraging enterprise reduces innovation and capacity.

48. Answer: A

A correct: rapid growth can create pollution/resource depletion and demand-pull inflation near capacity.
B wrong: employment usually rises, at least initially.
C wrong: living standards may rise, though not always equally.
D wrong: tax revenue often rises with growth.

49. Answer: A

A correct: near full employment, AD growth gives little real output gain and mostly higher prices.
B wrong: AD rising does not shift LRAS left.
C wrong: AD falling reduces output and may raise unemployment.
D wrong: imports do not fall to zero and inflation can occur.

50. Answer: A

A correct: education and technology raise productivity, shifting LRAS right and increasing potential output.
B wrong: higher oil prices shift SRAS left, causing higher inflation and lower output.
C wrong: higher income tax usually reduces consumption; it does not automatically raise potential output.
D wrong: lower productivity shifts LRAS left, not right.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.