1110 ECON Intermediate Macroeconomics Problem Set 8 Spring 2011 1. In what sense is the classical theory of aggregate supply "fundamentally incompatible" with the Keynesian system? 2. What do you see as the essential differences between the classical and Keynesian theories of aggregate supply? 3. What do you see as the essential differences between the classical and Keynesian theories of aggregate demand? 4. Compare the effects of an expansionary fiscal policy action--an increase in government spending financed by government bond sales to the public--in the Keynesian and classical models. Include in your answer the effects of this policy shift on the level of real income, employment, the price level, and the rate of interest. 5. Assume that there is an exogenous decline in the of price imported oil. Using the graphical analysis in this chapter, explain how such a shock would affect output and the price level. Explain the role inflationary expectations play in this adjustment. 6. Analyse the effects of an increase in the money supply within the Keynesian model where both the price level and money wage are assumed to be variable. Include in your answer the effects on the level of real income, the price level, the interest rate, and the money wage. 7. Suppose that the interest elasticity of money demand is zero within the Keynesian model with a fixed money wage but a variable price level. Analyse the effects of an autonomous increase in investment demand. Include in your answer the effects on the level of real output, the price level, and the rate of interest.