1) Suppose you are an advisor to the federal government. You are asked to look at macroeconomic data to evaluate whether the economy has entered an economic contraction this year. Which data do you look at? How does the economy behave at the onset of an economic contraction?
2) Explain what happens to inflation and unemployment during the business cycle.
3) Outline and explain the factors that shift the aggregate demand curve, and the short-run and long-run aggregate supply curves.
4) Explain how the static aggregate demand and aggregate supply model gives us misleading results about the price level, particularly with respect to decreases in aggregate demand. Describe how the aggregate demand curve is different in the dynamic model as compared to the static model and describe how potential GDP is different in the dynamic model as compared to the static model.
5) Use the dynamic aggregate demand and aggregate supply model to illustrate a supply shock that causes an increase in the price level and a decline in real GDP. Assume that potential GDP continues to grow due to other factors, and that the aggregate demand curve does not change.
6)Beginning at long-run equilibrium, (i) use the basic (static) aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a supply shock, and (ii) use the basic (static) aggregate supply and demand model to illustrate what happens in the long run following this supply shock. 1