1. Explain why the short-run aggregate supply curve is not vertical, but the long-run aggregate supply curve is vertical.
2. Why do wage increases along with increases of other input prices impact the short-run aggregate supply but not the long-run aggregate supply, unless they reflect permanent reductions in the supply of those inputs?
3. List and explain the theories for why the short-run aggregate-supply curve is upward sloping.
4. Suppose the economy is initially in the long-run equilibrium. Graphically illustrate the short-run effects of an increase in wages. What happens to the price level and level of real GDP?
5. Consider an economy that is above full-employment equilibrium (natural rate of output) due to an increase in AD. Prices of productive resources have not changed. With the help of a graph, discuss how the economy returns to long-run equilibrium, with no government intervention.
6.a. Using the AD-AS model, explain and illustrate how a supply shock can push an economy into a recession.
b. Using the same diagram, explain whether the government could use expansionary fiscal policy to get the economy out of the recession.
7. In the 1970s people had become accustomed to high inflation. In 1979, Bank of Canada decided to fight inflation and decreased the money supply growth rates. Many people thought that Bank of Canada's action would cause a recession. Is this thinking consistent with the aggregate demand and aggregate supply model? Explain. According the to monetary misperceptions theory what should have happened to output if the inflation rate fell relative to what people expected? Explain.
8. What is the marginal propensity to consume, and why is always less than one?
9. Assume that Graeme had $200,000 of disposable income and spent $180,000 on consumption in 2006 and had $300,000 of disposable income and spent $240,000 on consumption in 2007.
10. Consumption accounts for about 60% of GDP, while investments accounts for about 20% for GDP. However many economists think that, to understand an economic recession, it is more important to look at investment than consumption. Why?
11. Suppose that a scientific breakthrough leads to the discovery of a new cheap source of energy. What would be the effect of this invention in the short-run and in the long-run?