Macroeconomics

5. List and explain the three theories for why the short-run aggregate-supply curve is upward sloping.

Three theories for why the short-run aggregate-supply curve is upward sloping:

a. The sticky wage theory- nominal wages adjust slowly over time

b. The sticky price theory- the prices of goods and services also adjust sluggishly also in response to changing economic conditions.

c. The misperception theory-changes in all overall price level can temporarily mislead suppliers what is happening in the individual markets in which they sell their output.

6. What might shift the aggregate-demand curve to the left? Use the model of aggregate demand and aggregate supply to trace through the short-run and long-run effects of such a shift on output and the price level. Use the following diagram to help explain your answer.

7. Suppose the Fed expands the money supply, but because the public expects this Fed action, it simultaneously raises its expectation of the price level. What will happen to output and the price level in the short run? Compare this result to the outcome if the Fed expanded the money supply but the public didn’t change its expectation of the price level? Use the diagram below to explain your answer.

8. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate-demand curve?

9. Suppose that survey measures of consumer confidence indicate a wave of pessimism is sweeping the country. If policymakers do nothing, what will happen to aggregate demand? Explain what the Fed should do if it wants to stabilize aggregate demand. If the Fed does nothing, explain what Congress might do to stabilize aggregate demand.

10. What is "natural" about the natural rate of unemployment? Explain why the natural rate of unemployment might differ across countries.

11. What causes the lags in the effect of monetary and fiscal policy on aggregate demand? What are the implications of these...