1. What is meant by the interest rate effect, and why does it help to explain the shape of the aggregate demand curve?

2. Suppose the economy is initially in long-run equilibrium and there is a negative demand shock. Describe the short-run effects of this demand shock and how the economy will adjust in the long run.

3. Suppose the economy is in short-run equilibrium. Use the AD-AS model to predict short-run changes to real GDP and the aggregate price level if commodity prices suddenly increase.

4. What is meant by sticky wages, and how does this explain the shape of the short-run aggregate supply curve?

5. Many economists caution against extremely active stabilization policy because of time lags in its use. Explain this rationale.

6. Suppose that real GDP is $500, potential GDP is $1,000, and the marginal propensity to consume is 0.9. If the government is going to spend and does not impose taxes, what specific fiscal policy action should policy makers take?

7. Most economists do not support a law that requires the federal budget to be balanced every year. Explain why.

8. Suppose that economic policy makers want to increase real GDP by $100 with as little impact on the budget balance as possible. Should they increase government purchases of goods and services, increase transfer payments, or decrease taxes?