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352 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
e. In the late 1980s, OPEC began to lose control over the oil market as members began
cheating on the agreement. Oil prices fell, which led to a rightward shift of the short-run
aggregate-supply curve. This caused both unemployment and inflation to decline.
9.
FYI: The Origins of the Model of Aggregate Demand and Aggregate Supply
a. The AD/AS model is a by-product of the Great Depression.
Activity 1—National Output Article
Type: Take-home assignment
Topics: Fluctuations in output and the price level
Class limitations: Works in any class
Purpose
This assignment is a good way for students to connect economic theory to actual events.
Assignment
1. Find an article in a recent newspaper or magazine illustrating a change that will affect
national output.
2. Analyze the situation using economic reasoning.
3. Draw an aggregate demand and aggregate supply graph to explain this change. Be sure
to label your graph and clearly indicate which curve shifts. Explain what happens to
national income and to the price level in the short run.
4. Turn in a copy of the article along with your explanation.
Points for Discussion
This can be a nice way to review the elements of aggregate demand (consumption,
investment, government spending, and net exports) and the elements of aggregate supply
(productive resources, technology).
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 353
SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes
1. Three key facts about economic fluctuations are: (1) economic fluctuations are irregular and
2. The economy’s behavior in the short run differs from its behavior in the long run because the
Activity 2—The Economics of War
Type: In-class assignment
Topics: National income, price levels, total spending, resources
Materials needed: None
Time: 20 minutes
Class limitations: Works in any size class
Purpose
This assignment asks students to examine their beliefs about the impact of war on the
economy. It can be used to examine aggregate demand shifts and aggregate supply shifts.
This assignment can generate lively discussion.
Instructions
Ask the class to answer the following questions. Give them time to write an answer to a
question, then discuss their answers before moving to the next question.
1. Is war good or bad for the economy?
2. What are the opportunity costs of using resources in wars?
3. How would a war affect aggregate supply?
4. Graph the shift in aggregate supply. What happens to output and the price level?
5. How would a war affect aggregate demand?
6. Graph the shift in aggregate demand. What happens to output and the price level?
7. Is peace good or bad for the economy?
354 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
3. The aggregate-demand curve slopes downward for three reasons. First, when prices fall, the
value of dollars in people’s wallets and bank accounts rises, so they feel wealthier. As a
result, they spend more, thereby increasing the quantity of goods and services demanded.
4. The long-run aggregate-supply curve is vertical because the price level does not affect the
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 355
5. When a popular presidential candidate is elected, causing people to be more confident about
the future, they will spend more, causing the aggregate-demand curve to shift to the right,
Questions for Review
1. Two macroeconomic variables that decline when the economy goes into a recession are real
356 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
3. The aggregate-demand curve slopes downward because: (1) a decrease in the price level
makes consumers feel wealthier, which in turn encourages them to spend more, so there is a
4. The long-run aggregate supply curve is vertical because in the long run, an economy's supply
6. The aggregate-demand curve might shift to the left when something (other than a rise in the
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 357
7. The aggregate-supply curve might shift to the left because of a decline in the economy's
capital stock, labor supply, or productivity, or an increase in the natural rate of
358 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
Quick Check Multiple Choice
1. c
Problems and Applications
1. a. The current state of the economy is shown in Figure 6. The aggregate-demand curve
2. a. When the United States experiences a wave of immigration, the labor force increases, so
Price
Level
Long-Run Aggregate
Supply
AS
1
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 359
3. a. The current state of the economy is shown in Figure 7. The aggregate-demand curve
and short-run aggregate-supply curve intersect at the same point on the long-run
aggregate-supply curve.
b. If the central bank increases the money supply, aggregate demand shifts to the right (to
360 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
4. During the Great Depression, equilibrium output (
Y
1) was lower than the natural level of
5. a. The statement that "the aggregate-demand curve slopes downward because it is the
6. a. According to the sticky-wage theory, the economy is in a recession because the price
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 361
7. a. People will likely expect that the new chairman will not actively fight inflation so they will
362 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
8. a. If households decide to save a larger share of their income, they must spend less on
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 363
c. If increased job opportunities cause people to leave the country, the long-run and short-
9. a. When the stock market declines sharply, wealth declines, so the aggregate-demand
364 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
b. When the federal government increases spending on national defense, the rise in
c. When a technological improvement raises productivity, the long-run and short-run
Chapter 20/Aggregate Demand and Aggregate Supply ❖ 365
10. a. If firms become optimistic about future business conditions and increase investment, the
366 ❖ Chapter 20/Aggregate Demand and Aggregate Supply
b. Over time, as the misperceptions of the price level disappear, wages adjust, or prices
