Reflect on the major topics of this unit and answer any three of the problems at the end of chapter seven in the text book. Be sure to consider alternative perspectives as you answer the problems.

1. Explain how the following changes in aggregate demand or short-run aggregate supply, other things held unchanged, are likely to affect the level of total output and the price level in the short run.

a. An increase in aggregate demand

b. A decrease in aggregate demand

c. An increase in short-run aggregate supply

d. A reduction in short-run aggregate supply

2. Explain why a change in one component of aggregate demand will cause the aggregate demand curve to shift by a multiple of the initial change.

3. Use the model of aggregate demand and short-run aggregate supply to explain how each of the following would affect real GDP and the price level in the short run.

a. An increase in government purchases

b. A reduction in nominal wages

c. A major improvement in technology

d. A reduction in net exports

4. How would an increase in the supply of labor affect the natural level of employment and potential output? How would it affect the real wage, the level of real GDP, and the price level in the short run? How would it affect long-run aggregate supply? What kind of gaps would be created?

5. Give three reasons for the downward slope of the aggregate demand curve.

6. "When the price level falls, people's wealth increases. When wealth increases, the real volume of consumption increases. Therefore, a decrease in the price level will cause the aggregate demand curve to shift to the right." Do you agree? Explain.

7. Suppose the economy has a recessionary gap. We know that if we do nothing, the economy will close the gap on its own. Alternatively, we could arrange for an increase in aggregate demand (say, by increasing government spending) to close the gap. How would your views about the degree of price stickiness in the economy influence your views on whether such a policy would be desirable?

8. The cost of hiring workers includes not only payments made directly to workers, that is, wages, but payments made on behalf of workers as well, such as contributions by employers to pension plans and to health-care Chapter 7 Aggregate Demand and Aggregate Supply 7.4 Review and Practice 313 insurance for employees. How would a decrease in the cost of employer provided health insurance affect the economy? Using Figure 7.8 "An Increase in Health Insurance Premiums Paid by Firms" as a guide, draw a graph to illustrate your answer.

9. Suppose nominal wages never changed. What would be the significance of such a characteristic?

10. Suppose the minimum wage were increased sharply. How would this affect the equilibrium price level and output level in the model of aggregate demand and aggregate supply in the short run? In the long run?

11. Explain the short-run impact of each of the following.

a. A discovery that makes cold fusion a reality, greatly reducing the cost of producing energy

b. An increase in the payroll tax