Chapter 8

• 1.Draw the complete IS-LM-AD-AS-Labor Market-Production Function pictures of the economy.Label every axis and every curve.What are the endogenous variables?What are some variables that are exogenous?
• 2.What is meant by a demand shock?Give an example of a positive demand shock and a negative demand shock.
• 3.Suppose an economy begins at full employment and there is a sudden drop in consumer spending due to worries about global stability.Predict what will happen in the short run to Y, r, P, L and W/P assuming W is fixed.
• 4.What is meant by a supply shock?Given an example of both a positive and negative supply shock.
• 5.Using the long run vertical AS curve, suppose a war destroys half of the country's capital stock, reducing the productivity of labor.What will happen in the long run to Y, r, P, L and W/P?

Chapter 9

• 1.Milton Friedman said that "Inflation is always and everywhere a monetary phenomenon".Does this mean that every inflation is caused by excess money creation?If yes, explain why.If no, what does he mean?
• 2.Suppose that actual and expected inflation are both 3%.If the nominal interest rate is 4%, what is the real rate?If the real interest rate is 2% what is the nominal rate?
• 3.Can interest rates ever be negative?Why is it important to distinguish nominal from real rates in answering this question?
• 4.What rate of inflation does the FED try to achieve?Why isn't this rate 0%?
• 5.Which is worse for an economy, inflation or deflation?Explain.