Aggregate Demand and Supply:
Problem 1) In each part of this question, assume that the U.S. economy starts from a situation where real GDP equals potential GDP.
a) A deep recession occurs, how does this event affect AD, GDP, and the price level (P)?
b) The world price of crude oil rises by a large amount, how does this event affect AD, GDP and P?
c) The world price of crude oil rises by a large amount, how does this event affect AS, GDP, and P?
d) U.S. businesses expect future profits to fall, how does this event affect AD, GDP, and P?
Fiscal Policy:
Problem 2) Explain the change in AD when:
a) Government expenditure increases by $100 billion, which the government spends on national defense.
b) Taxes are increased by $100 billion.
c) Parts (a) and (b) simultaneously.