The best preparation for my multiple choice tests is generally either the practice quizzes and tests in the
Study Guide, or looking at old exams.
Some old exams can be found in earlier semesters via
However, be warned that the textbook and the structure [order of material] I am using this semester is not
quite the same as in recent previous semesters, so the coverage of none of the old exams is quite the same as
this one – so the old exams will not cover the same material as this exam.
Sorry about that.
Review for Second Midterm; key issues.
What Aggregate Demand [how demand for real GDP varies with the price level and why] and
Aggregate Supply [how supply of real GDP varies with the output price level in the short run while input
prices are unchanged, and why] mean, and what shifts them.
AD slopes down because of wealth effect
[money assets buy less real output if the price level goes up] and substitution effect [our goods are relatively
more expensive compared to foreign goods if our output price level goes up, so the quantity of them people
want to buy goes down].
AD increases [shifts right] if any of its components, C + I + G + (X – M), increase.
SAS slopes up because if output prices increase, input prices fixed, real wages have gone down and it is more
profitable to produce so more will be produced and offered for sale.
SAS shifts [left or right] if potential
GDP [LAS] shifts [left or right], or shifts [left or right] if input prices change [up or down; if SAS shifts left,
it cuts LAS higher up, indicating higher input prices in long run equilibrium].
Output of real GDP in the
short run depends on employment; the production function relates labor input to real GDP output, and shows
Real factors determine real output and growth in the long run, money growth
determines price level and inflation.
Business cycle: peak – recession – trough – expansion.
SAS slopes up to right because it reflects supply of output as output prices change,
input prices [and every thing else] fixed; more profitable to produce, real wages are lower so more workers
employed, if output prices rise and input prices [wages] fixed.
If wages go up, SAS shifts left.
shift potential GDP [LAS, vertical line, capacity] left or right also shift SAS left or right [technical change,
larger labor force, larger capital stock].
AD slopes down to right because (1) wealth effect [higher output