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Subjective Short Answer
1. Explain how a recession differs from a depression.
2. Identify the direction of the change during a recession in each of the following: consumption expenditures, investment
expenditures, and unemployment.
3. Name two macroeconomic variables that decline when an economy goes into recession, and name one macroeconomic
variable that rises.
4. Briefly state the three key facts about economic fluctuations.
Figure 33-12.
5. Refer to Figure 33-12. Identify periods 1 and 2.
6. Refer to Figure 33-12. Explain how the aggregate demand and aggregate supply model changed during periods 1 and
2.
7. What curve shows the quantity of goods and services that households, firms, the government, and customers abroad
want to buy at each price level?
8. What curve shows the quantity of goods and services that firms choose to produce and sell at each price level?
9. List the three reasons for why the aggregate-demand curve slopes downward.
10. The wealth effect helps explain what feature in the aggregate demand and aggregate supply model?
11. The exchange-rate effect helps explain what feature in the aggregate demand and aggregate supply model?
12. Suppose a boom in stock market prices helps make people feel wealthier. Using the model of aggregate demand and
aggregate supply, identify the curves that are affected, and which way these curves would shift.
13. Suppose the government raises taxes. Which curves in the aggregate demand and aggregate supply model would be
affected, and which way would they shift?
14. Suppose speculators lost confidence in foreign economies and bought more U.S. bonds. How would this affect net
exports in the U.S., and which way would this cause the aggregate demand curve to shift?
15. Suppose a recession overseas reduces a country’s exports. Which curve(s) in the aggregate demand and aggregate
supply model would be affected, and which way would it (they) shift?
16. Suppose a country offers a new investment tax credit. Which curve(s) in the aggregate demand and aggregate supply
model would be affected, and which way would it (they) shift?
17. Suppose technology advances within a nation. Which curves in the aggregate demand and aggregate supply model
would be affected, and which way would they shift?
18. Suppose a nation experiences increased immigration from abroad. Which curves in the aggregate demand and
aggregate supply model would be affected, and which way would they shift?
19. List the three alternative explanations for the upward slope of the short run aggregate supply curve.
20. The sticky-price theory helps explain what feature of the aggregate demand and aggregate supply model?
21. Misperceptions theory helps explain what feature of the aggregate demand and aggregate supply model?
22. Identify the variables that could cause shifts in both the short-run and long-run aggregate-supply curves.
23. Explain how a change in the expected price level would shift the short-run and long-run aggregate-supply curves.
24. Suppose a country experiences an increase in its capital stock. Which curve(s) in the aggregate demand and aggregate
supply model would be affected, and which way would it (they) shift?
25. Suppose a country experiences a change in weather patterns that makes farming more difficult. Which curve(s) in the
aggregate demand and aggregate supply model would be affected, and which way would it (they) shift?
26. Suppose people anticipate an increase in the expected price level. Which curve(s) in the aggregate demand and
aggregate supply model would be affected, and which way would it (they) shift?
27. A decrease in what variable will raise the quantity of goods and services supplied, and shift only the short run
aggregate supply curve to the right?
28. Other things the same, what happens to the price level and the quantity of output when the short run aggregate supply
curve shifts to the right?
29. Changes in what four variables will shift the long run aggregate supply curve?
30. Suppose the expected price level increases. Which curves in the aggregate demand and aggregate supply model would
be affected, and which way would they shift?
31. Write the mathematical expression that summarizes the three alternative explanations for the upward slope of the short
run aggregate supply curve.
32. A recession with inflation is know by what term?
Figure 33-13.
33. Refer to Figure 33-13. Identify the price and output levels consistent with long-run equilibrium.
Figure 33-14.
34. Refer to Figure 33-14. Identify which long run aggregate-supply curve(s) would be consistent with long-run
equilibrium.
35. Other things the same, what happens in the short run to the price level and quantity of output when the aggregate
demand curve shifts to the left?
36. Other things the same, what happens in the long run to the price level and quantity of output after a contraction in
aggregate demand?
37. Other things the same, what happens to the price level and quantity of output when an adverse shift in the short run
aggregate supply curve occurs?
38. Explain the short-run effects on output and the price level from a decrease in the aggregate-demand curve.
Figure 33-15.
39. Refer to Figure 33-15. Suppose the economy begins at point A. Decreases in what four variables could result in a
movement to point D?
Figure 33-16.
40. Refer to Figure 33-16. Suppose the economy starts at P3 and Y2. If there is a decrease in government purchases,
identify the price and output levels that the economy would move to in the short run.
Figure 33-17.
41. Refer to Figure 33-17. Suppose the economy starts at P3 and Y2. Explain how government purchases would need to
change to move the economy to P2 and Y1. What about taxes?
42. Using the aggregate demand and aggregate supply model, a decrease of what curve is by itself consistent with the
changes in prices and output that occurred during the onset of the Great Depression?
43. Using the aggregate demand and aggregate supply model, an increase in what curve is by itself consistent with the
changes in prices and output that occurred during World War II?
44. In the aggregate demand and aggregate supply model, the point where the aggregate demand curve crosses the long
run aggregate supply curve, and the expected price level equals the actual price level, is known as what?
45. Explain the effect on output and price level from an increase in the short-run aggregate-supply curve.
46. During periods of stagflation, what happens to output and prices in the economy?
47. Compare changes in the price level for a recession resulting from a shift in aggregate demand to that of a recession
resulting from a shift in short run aggregate supply.
48. Who is credited for the original development of the model of aggregate demand and aggregate supply?
49. Who wrote the 1936 book titled The General Theory of Employment, Interest, and Money?
50. Who said about classical economic theory: “the long run is a misleading guide to current affairs. In the long run we
are all dead”?
51. The long-run trend in real GDP is upward. How is this possible given business cycles? What explains the upward
trend?
52. What variables besides real GDP tend to decline during recessions? Given the definition of real GDP, argue that
declines in these variables are to be expected.
53. What do most economists believe concerning the relation between the price level and real output?
54. Make a list of expenditures whose sum equals GDP.
55. Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to
changes in investment and net exports?
56. Make a list of things that would shift the aggregate demand curve to the right.
57. Make a list of things that would shift the long-run aggregate supply curve to the right.
58. Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.
59. Use sticky-wage theory to explain why an increase in the expected price level shifts the aggregate supply curve.
60. Keynes thought that the behavior of the economy in the short run was influenced by what he called "animal spirits."
By this he meant that business people sometimes felt good about the economy, and carried out lots of investment, and at
other times felt bad about the economy, and so cut back on their investment spending. Explain how such fluctuations in
investment would lead to fluctuations in real GDP and prices.
61. Suppose that a decrease in the demand for goods and services pushes the economy into recession. What happens to the
price level? If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of
output?
