1. List and explain the three reasons the aggregate-demand
curve is downward sloping.
2. Explain why the long-run aggregate-supply curve is
vertical
3. What might shift the aggregate-demand curve to the left?
Use the model of aggregate demand and aggregate supply to trace through the
short-run and long-run effects of such a shift on output and the price level
4. What might shift the aggregate-supply curve to the left?
Use the model of aggregate demand and aggregate supply to trace through the
short-run and long-run effects of such a shift on output and the price level
a.
Draw a diagram to illustrate the state of the
economy. Be sure to show aggregate demand, short-run aggregate supply, and
long-run aggregate supply.
b.
Now suppose that a stock-market crash causes
aggregate demand to fall. Use your diagram to show what happens to output and
price level in the short run. What happens to the unemployment rate?
c.
Use the sticky-wage theory of aggregate supply to
explain what will happen to output and the price level in the long run (assuming
there is no change in policy). What role does the expected price level play in
this adjustment? Be sure to illustrate your analysis in a graph.
6.
Explain whether each of the following events will
increase, decrease, or have no effect on short-run aggregate supply.
a.
The United States experiences a wave of
immigration
b.
Congress raises the minimum wage to $10 per hour
c.
Intel invents a new and more powerful computer
chip
d.
A severe hurricane damages factories long the
East Coast.
7.
In 1939, the U.S. economy not yet fully recovered
from the Great Depression, President Roosevelt proclaimed that Thanksgiving
would fall a week earlier than usual so that the shopping period before
Christmas would be longer. Explain what President Roosevelt might have been
trying to achieve, using the model of aggregate demand and aggregate supply.
8.
Explain why the following statements are false.
a.
“The aggregate-demand curve slopes down ward
because it is the horizontal sum of the demand curves for individual goods.”
b.
“The long-run aggregate-supply curve is vertical
because economic forces do not affect long-run aggregate supply.”
c.
“If firms adjusted their prices every day, then
the short-run aggregate-supply curve would be horizontal.”
d.
“Whenever the economy enters a recession, its
long-run aggregate-supply curve shifts to the left.”
9.
Suppose that the economy is currently in a
recession. If policymakers that no action, how will the economy change over
time? Explain in words and using an aggregate-demand/aggregate-supply diagram.
10.
For each of the following events, explain the
short-run and long-run effects on output and the price level, assuming
policymakers take no actions.
a.
The stock market declines sharply, reducing
consumers’ wealth.
b.
The federal government increases spending on
national defense.
c.
A technological improvement raises productivity
d.
A recession overseas causes foreigners to buy
fewer U.S. goods.