Question 1

Define the following terms,

1. Full employment output 2. Aggregate Supply 3. Aggregate Demand

4. Laissez-Faire 5. Unemployment Rate

Question 2

Using graphical illustration of AS-AD framework, show the effects of following events on real output and price level in the economy.

• A wave of immigration increases the labor force.
• An earthquake destroys some of the capital stock.
• A technological advance improves the production.
• The government raises taxes by $100 billion.
• Government announces an interest rate cut to encourage business investment.

Question 3

Consider a three sector economy that can be classified by following equation,

Y = C + I + G

Where, C = 250 + 0.75(Y T), G = 1,000, T = 1,000, I = 1,000

Using the information given above, calculate the output of the economy.

Question 4

Why the classical economists failed to explain the reason of the great depression? What did the Keynesian economists put forward in reponse to that event?