1. According to the classicals, deviations from full employment are due to adjustments from shifts in the labor supply and demand curves. These shifts were discussed in chapters 8 and 9. Why do Keynesians argue this point?
2. Determine the slope of this AE line, and then complete the schedule below. Hint words: Linear relationship 40 pts
Slope?___________
Income Aggregate Expenditures (C + I + G)
$ 700 $1200
$1700 $1950
$2700 _____
$3700 _____
$4700 _____
$5700 _____
Draw this graph complete with an AP curve.
3. At what level of output (income) will this economy operate?
4. Line up this AE/AP graph above a production graph. Demonstrate with a dotted line that there is a recessionary gap where potential output is $4600.
5. How much of a gap is there?
6. What is the MPS and the Multiplier?
7. The government can close this gap two ways. They can increase government expenditures by $_____________ or they can reduce taxes by $______________. Show all work.