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AS-AD Model: Consider the short-run model of the economy and answer the following questions:

a. The key

difference between the long-run and short-run model is the assumption that prices are flexible. In the short-run prices are assumed to be fixed (or, at least, prices are expected not to fall). Why might prices be sticky downward?

b. The short-run aggregate supply curve is thought to be upward sloping (at least above the full employment level of output). Compare that to the long-aggregate supply curve and explain why the two might differ.

c. In the short-run model, it is generally assumed that price levels do not change. How then does the economy move to an equilibrium level of GDP?

d. Suppose that consumer wealth falls because the stock market takes a nose dive. If the economy begins at full employment, how does that affect GDP? Briefly describe the process and the outcome.

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