Exam 8: The Aggregate Demand-Aggregate Supply Model

What is the paradox of thrift?

What was the Classical economists' suggestion for ending unemployment during the Great Depression?

What factors shift the short-run aggregate supply (SAS) curve? Explain the impact of changes in each factor on the SAS curve.

Canada is the largest trading partner of the U.S.Suppose the U.S.economy keeps growing.What will happen to the AD curve for Canada?

In the standard supply demand model, a fall in price brings a market with a shortage of quantity demanded into equilibrium by increasing the quantity demanded and decreasing the quantity supplied.Why doesn't that work in the aggregate?

For each of the following "quotes" from The Wall Street Journal, draw a picture to show how the AD curve will shift.Label your original curve AD₀ and your new curve AD₁. (a) "The value of the US dollar rose about 50% against the yen and 20% against the mark." (b) "The Dow Jones Industrials closed above 25,000 for the first time." (c) "Federal investment in civilian capital and infrastructure, education, and research and development is falling."

Why would the U.S.be concerned about economies in other parts of the world, particularly Japan, Western Europe, Canada, and Mexico, having recessions?

Using an AS/AD diagram, demonstrate graphically and explain verbally the short-run impact on the price level and real output of an increase in the labor productivity schedule.

Keynes did not agree with the way the Classical economists described the workings of the economy.What was the essence of his thinking?

What is the key insight of the Keynesian AS/AD model, and what implication does this insight have for policy?

Demonstrate graphically and explain verbally the role the multiplier effect has in the shape of the aggregate demand curve.

How might feedback effects cause a fall in housing prices (like the one that set off the crisis in the U.S.economy in 2008) to cause a worse result than the one predicted by the standard AS/AD model?

Explain why the long-run aggregate supply (LAS) curve is vertical.What determines the position of the LAS curve?

Describe two ways in which the macro AS/AD model differs from the micro supply and demand model.

Suppose that in order to win voter support for reelection, an incumbent President pushes a tax cut through Congress.What impact will this have on the AD curve?

Demonstrate graphically and explain verbally the comparison of the impact of a drop in the price level on the shape of the aggregate demand curve when the multiplier effect is positive to when it is zero.

According to Keynes there is a difference between equilibrium income and potential income.Explain this difference.

Give two examples of expectations that would tend to cause the aggregate demand curve to rise (shift out to the right).

The shape of the short-run aggregate supply (SAS) curve reflects two different types of microeconomic markets (auction markets and the posted price markets).How is the price level linked to the level of output in each market? List five factors that might cause an upward shift of the SAS curve.

Explain the difference between the long run and short-run views of saving.