Unit 3: Aggregate Demand and Aggregate Supply Problem Set #3 1. ( /15) Key Concepts Define and explain each concept and give specific examples: a. Marginal Propensity to Consume and Marginal Propensity to Save ( /5) b. The Multiplier Effect and Spending Multiplier (_ 15) c. Deficit Spending and Crowding Out ( 15) 2. ( _ /20 Points) Fiscal Policy and Graphing Practice a. Explain the difference between discretionary and non-discretionary fiscal policy and the difference between expansionary and contractionary fiscal policy. Give examples of each. ( /5) b. Use aggregate demand, aggregate supply, and LRAS to show both a recessionary gap and an inflationary gap. Draw and explain how fiscal policy can be used to close each gap. ( /5) c. Draw another set of graphs showing recessionary gap and an inflationary gap. Explain what happens to both graphs in the long-run without government intervention ( /5) d. Draw the short-run and long-run Phillips curve. Label three points representing a recessionary gap, and inflationary gap, and full employment output. Identify what happens to the short-run Phillips curve when there is a change in aggregate demand and when there is a change in aggregate supply 15) 3. (_ /5) Economic Growth a. Define capital stock. Use the aggregate demand and supply to show the effects of a decrease in interest rates in the short-run and in the long-run. Explain why an increase in consumer spending would not have the same effect in the long-run. 4. ( _ /20) Worksheets a. Unit Study Guide (_ /10) b. AD and AS Practice Sheet ( /10) 5. ( /30 Points) Practice Free Response Questions Complete the attached FRQs. Make sure to fully explain when asked. They DO NOT need to be typed: FRQ #1: ( /10) FRQ #2: ( /10) FRQ #3: ( 15) FRQ# 4: (_ 15)