Write your responses in complete sentences. Your answers to each question should include 2-3 paragraphs (125-250 words).
1. What shape did the short-run aggregate supply curve have during the 1930s, according to Keynes? Explain.
2. What is the multiplier? How is it calculated? Why is the multiplier related only to consumption spending?
3. What are the macroeconomic consequences of a budget deficit when the economy is operating at full employment? Be sure to discuss the effects in the short run and long run.
4. Suppose that the Fed purchases $1 million in bonds in the open market. Explain how the money supply can increase by more than $1 million.
5. What happens to the price of bonds when the Fed sells bonds? What happens to the interest rate? What happens to the money supply?