1. What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run-aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve. Why is the short-run curve relatively flat to the left of the full-employment output and relatively steep to the right?
2. Other things equal, what effect will each of the following have on the equilibrium price level and level of real output.?
A. An increase in aggregate demand in the steep portion of the aggregate supply curve.
B. An increase in aggregate supply, with no change in aggregate demand (assume that price and wages are flexiable upward and downword.)
C. Equal increases in aggregate demand and aggregate supply.
D. A reduction in aggregate demand in the relatively flat portion of the aggregate supply curve.
E. An increase in aggregate demand and a decrease in aggregate supply.
3. Why does a reduction in aggregate demand tend to reduce real output, rather than the price level?