1. Explain how and why each of the following factors wouldinfluence current aggregate demand in the United States:

(a) an increased fear of recession

(b) an increased fear of inflation

(c) the rapid growth of real income in Canada and WesternEurope

(d) a reduction in the real interest rate

(e) a decline in housing prices

(f) a higher price level (be careful)

2. Which of the following would be most likely to shiftthe
long-run aggregate supply curve (LRAS) to the left?

a. unfavorable weather conditions that reduced the size of thisyear’s grain harvest

b. an increase in labor productivity as the result of improvedcomputer technology and expansion in the Internet

c. an increase in the cost of security as the result ofterrorist activities

3. How would an increase in the economy’s productionpossibilities influence the LRAS?

4. Suppose consumers and investors suddenly become morepessimistic about the future and therefore decide to reduce theirconsumption and investment spending. How will a market economyadjust to this increase in pessimism?

5. “If the general level of prices is higher than business
decision makers anticipated when they entered into
long-term contracts for raw materials and other
resources, profit margins will be abnormally low and
the economy will fall into a recession.”
– Is this statement true?

6. Which of the following would be most likely to throwthe
U.S. economy into a recession?

(a) a reduction in transaction costs as the result of the growthand development of the Internet

(b) an unanticipated reduction in the world price of oil (willthe impact of this factor differ between oil producing and oilconsuming states?)

(c) an unanticipated reduction in AD as the result of a sharpdecline in consumer confidence

7. During the first half of 2008, the world price of oil soaredwhile stock and housing prices plunged. Within the framework of theAD-AS model, how would these two changes influence the U.S.economy? Explain the expected impact on output & pricelevel.

8. When actual output is less than the economy’s full employmentlevel of output, how will real resource prices and real interestrates adjust?

9. Construct the AD, SRAS, & LRAS curves for an economyexperiencing:

(a) full employment equilibrium

(b) an economic boom

(c) a recession