QUESTION A. -

1.List and explain ONE of the three reasons why the aggregate demand curve slopes downward.

2.Draw an AD curve to answer each of the following events using this initial information: The current price level is 110, and the current level of real GDP is $14.2 trillion. Illustrate the impact of each of the following events on the AD curve.

a.Firms become more pessimistic and reduce their investment.Assume the price level remains constant.

b. The price level rises to 115, while all other variables remain constant

c.Faster income growth in other countries that the U.S trades with.

3.Draw a SRAS curve to answer each of the following events, and show how each of the following events would affect the SRAS curve?

a.An increase in the price level

b.An unexpected increase in the price of an important raw material

c.An increase in productivity coming from a positive technological change.

4.What happens to exports (X),imports (M), and net exports (NX) if the exchange rate between the U.S. dollar and foreign currencies rises (i.e. if the U.S. dollar appreciates).

EXPORTS (X) :

IMPORTS(M) :

NET EXPORTS(NX) :

5.For each question below, start with a diagram of a healthy economy (it is at a macro-equilibrium with full employment) before the event occur.Showgraphically the direction of each of the following events either on aggregate demand OR on aggregate supply.How will real GDP, employment,and the price level change in theSHORT RUN?

a. The price of crude oil, a major input in the production process,rises significantly.

b. An improvement in technology raises labor productivity

c. An increasein real GDP (income)in the countries that buy U.S. exports (major trading partners)

6.

1 . Diagrammatically represent an economy in a recessionary gap.

2.Suppose the economy is self-regulating.Describe the series of adjustments that will ultimately bring the economy back to full-employment equilibrium. Show the effects of those adjustments on the diagram above