Practice Questions to accompany Mankiw & Taylor: Economics 1 Chapter 37 1. Suppose a wave of pessimism engulfs consumers and firms, causing them to reduce their expenditures. a. Demonstrate this event in Exhibit 1 using the model of aggregate demand and aggregate supply and assuming that the economy was originally in long-run equilibrium. Exhibit 1 Answer: See Exhibit 3. Exhibit 3 b. What is the appropriate activist policy response for monetary and fiscal policy? In which direction would the activist policy shift aggregate demand? Answer: Increase the money supply, increase government spending, decrease taxes. Shift aggregate demand to the right.
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