1. Briefly define the following terms:
a. Potential GDP
b. Long-run aggregate supply
c. Short-run aggregate supply
d. Aggregate demand
2. In a separate diagram, draw each of the following curves and, in your own words, explain their shapes using economic reasoning.
a. Long-run aggregate supply curve.
b. Short-run aggregate supply curve.
c. Aggregate demand curve.
3. Suppose that the government increases its purchases of goods and services.
a. What is the effect on the aggregate demand curve of the increase in government purchases?
b. Using an aggregate supply and aggregate demand diagram, show the short-run effect on the price level and real GDP from an increase in government purchases of goods and services.
4. What occurs when real GDP exceeds potential GDP? What curve shifts in order to restore real GDP to potential GDP? Why does this curve shift?
Answer the following multiple choice questions.
5. In the macroeconomic long run,
a. real GDP equals potential GDP.
b. the economy is at full employment.
c. regardless of the price level, the economy is producing at potential GDP.
d. All of the above are correct.
6. The text discusses reasons why the AD, SAS and LAS curves shift rightward over time. If there is inflation, which curve shifts rightward at a faster pace?
a. AD curve
b. SAS curve
c. LAS curve
d. The curves shift rightward at the same pace