Chapter 24 aggregate demand and aggregate supply

1.     Graph a Phillips curve.  Explain why the long-run Phillips curve is vertical.  Could there be more than one short run Phillips curve?  (Hint:  Consider a change in price expectations.)

2.     Explain the wealth effect, the substitution-of-foreign-goods effect, and the constant nominal income effect.

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3.     What are the major sources of changes in aggregate demand? What are the short-run effects? The long-run effects?

4.     What does investment spending consist of? How is investment spending related to the interest rate? Which is more volatile, consumption or investment? Which makes up a larger component of GDP?

5.     Explain why only government purchases of goods and services, and not transfers, are a component of aggregate demand.

6.     What are net exports? How are they related to the exchange rate?

7.     If prices and wages always change by exactly the same percentage and are expected to always do so, how is the short-run aggregate supply curve shaped? Make an argument that in this case, there is no such thing as a short-run aggregate supply curve. What is the real wage?

8.     What is the GDP deflator?

9.     Can the natural level of real output ever change? If so, when? How is the natural level of real output related to the long-run aggregate supply curve?

10.  How do price expectations affect the position of the short-run aggregate supply curve?

11.  What is the difference between rational expectations and adaptive expectations?  Consider the impact of a predictable change in the economy in the context of each.

12.  Graphically illustrate the difference between a change in aggregate demand and a change in the aggregate quantity demanded of real GDP. Illustrate an increase in aggregate demand and an increase in the quantity demanded of real GDP.

13.  Use aggregate supply and aggregate demand curves to explain what will happen to prices, output, and employment, ceteris paribus, in each of the following situations:

a.The government cuts spending.

        b.       The Fed makes open market purchases.

        c.       Corporate tax rates are increased.

        d.       Interest rates abroad increase.

14.  Why is the demand curve for wheat downward sloping? Why is the aggregate demand curve downward sloping? Explain why the reasons are different.

15.  Draw a short-run aggregate supply curve. Why is the curve upward sloping? What causes the short-run aggregate supply curve to shift?

16.  Use graphs to explain demand-pull inflation.

17.  Assume that the economy is originally in long-run equilibrium and that there is a drop in demand. Use graphs to explain how and why the economy initially moves to a short-run equilibrium with unemployment. How does the economy return to long-run equilibrium?

18.  Explain the difference between aggregate demand and the aggregate quantity demanded of real output. Ceteris paribus, how is quantity demanded related to the overall price level?


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