Part -1:
1. We are studying the short-run fluctuations; previous chapters we studied the long-run economic environment. What is the difference between the short-run and long-run (consider a later question on the SRAS)?
2. What is the Aggregate Demand (AD) and Aggregate Supply (AS) curve, in your own words?
3. Why is the long-run Aggregate Supply (LRAS) curve vertical?
4. What is the sticky wage theory and how does it explain why the short-run Aggregate Supply (SRAS) curve is sloped up?
5. List the things that shift each curve. Note that if something shifts the LRAS curve, it will shift the SRAS curve as well (but not the other way around).
Part -2:
1. Briefly explain the graph in Figure 1 in your own words. If the Federal Reserve increases the Money Supply, what happens in the short run? If the interest rate is high, why would people prefer to hold less money?
2. What would happen to I (Investment spending) if the interest rate decreased?