1. True or False?

A. If the current level of GDP is equal to the full employment (potential) level, then the unemployment rate equals 0%.

B. Aggregate demand is inversely related to the price level because as the price of a good decreases people will buy less of the good.

C. Say's law says that demand creates its own supply.

D. In the Keynesian range the aggregate demand curve is relatively steep.

E. Stagflation results from an increase in aggregate supply.

F. When aggregate demand increases, the price level falls.

G. When aggregate supply increases, the price level rises.

H. The quantity of aggregate output supplied is inversely related to the price level.

II. Shifts in Aggregate Supply and Aggregate Demand

A. Identify how the aggregate demand curve for a country is affected by the given change. (shift right, shift left, or neither)

_____1. higher interest rates leads to less consumption spending

_____2. an increase in the price level

_____3. an increase in labor's productivity

B. Identify how the aggregate supply curve for a country is affected by the given changes. (shift right, shift left, or neither)

_____1. a decrease in labor's productivity

_____2. taxes are reduced on individuals

_____3. a decrease in the price level

III. In the short run, what is the impact on aggregate output and the price level of each of the following? Use a graph showing aggregate demand and short-run aggregate supply curves to support your answer.

A. An increase in consumption caused by a drop in interest rates.

B. A rise in wages rates.

C. A decline in productivity.

D. A decrease in exports caused by an appreciation of the dollar.