ANSWERS to HOMEWORK #8E202 Spring 2008 The following questions draw from the material in Chapter 15, a chapter so packed with macroeconomic insight that you should read ittwice. 1. Explain why the long-run aggregate supply curve is vertical. Output of the economy in the long run is determined by the productivity of resources and technology, not the level of prices. A vertical LRAS indicates precisely that fact, i.e., that output in the long run is unrelated to the price level. Note that this is a geometric restatement of the classical dichotomy (from Chapter 12). 2. List and explain the three theories for why the aggregate supply curve is upward sloping. Misperceptions, sticky wages, and sticky prices. See pp. 330-332. 3. Draw a diagram with aggregate demand, short-run aggregate supply, and long-run aggregate supply. Be careful to label all curves and axes correctly. Note. The following graph is drawn with the economy in LR equilibrium. 4. a. What events would cause the aggregate demand curve to shift to the left? decrease G decrease C increase S increase T decrease I increase r decrease Msdecrease EX increase IMb. Use the AD-AS model to trace through the short-run and long-run effects of such a shift. See Figure 8 on page 336. SR effects: decrease in AD from AD1to AD2, which causes output to fall from Y1to Y2and unemployment to rise (note that the change in unemployment is
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