1.) During a typical recession, which component of expenditure contributes the most to the decrease in GDP?

a.) Consumption spending

b.) Investment spending

c.) Government spending

d.) Net exports

As the price level in an economy decreases, the real value of money holdings of households and firms is higher. Since the real value of assets is greater, firms and households purchase more goods and services, so aggregate demand is greater. This is known as ________

a.) The inflation rate effect

b.). The wealth effect

c.) The interest rate effect

d.) The exchange rate effect

3.) Explain how the Aggregate Demand/Aggregate Supply model moves from short-run equilibrium to long-run equilibrium. Explicitly state what happens when there is a recessionary gap, and what happens when there is an inflationary gap.