Explain the three reasons why the aggregate demand (AD) curve slopes downward.

b.Briefly explain how each of the following events would affect the AD curve.

i.An increase in the price level

ii.An increase in government purchases

iii.Higher income taxes

iv.Higher interest rates

v.Faster income growth in other countries

#QUESTION 2

Explain why the long-run aggregate supply (LRAS) curve is vertical while the short-run aggregate supply (SRAS) curve slope upwards. List and discuss briefly the variables that could cause the LRAS and the SRAS curves to shift. For each variable, identify whether an increase in that variable will cause the curves (LRAS and SRAS curves) to shift to the right or to the left.

#QUESTION 3

2.1 Macroeconomic conditions affect the decisions firms and families make. Why, for example, might a university student after graduation enter the job market during an economic expansion but apply for postgraduate study during a recession?

2.2 Briefly explain whether each of the following transactions represents the purchase of a final good.

a.The purchase of wheat from a wheat farmer by a bakery

b.The purchase of a submarine by the federal government

c.The purchase of French wine by an Australian consumer

d.The purchase of a new machine by BHP Billiton for an iron ore mine in Australia.

2.3Is the value of a house built in 2000 and resold in 2018 included in the GDP of 2018? Why or why not? Would the services of the real estate agent who helped sell (or buy) the house in 2018 be counted in GDP for 2018? Why or why not?

2.4Suppose a country has many of its citizens temporarily working in other countries and many of its firms have facilities in other countries. Furthermore, relatively few citizens of foreign countries are working in this country and relatively few foreign firms have facilities in this country. In these circumstances, which would you expect to be larger for this country, GDP or GNI? Briefly explain.

2.5Suppose that a simple economy produces only the following four goods and services:textbooks, hamburgers, shirts and cotton. Assume that all of the cotton is used in the production of shirts. Use the information in the following table to calculate nominal GDP for 2018.

PRODUCTION AND PRICE STATISTICS FOR 2018

PRODUCT

QUANTITY

PRICE ($)

Textbooks

100

60.00

Hamburgers

100

2.00

Shirts

50

25.00

Cotton

800

0.60