1. 1.Economic fluctuations are irregular and unpredictable 2. Most macroeconomic quantities fluctuate together
3. As output falls, unemployment rises.
2. Most economists use the model of aggregate demand and aggregate supply to study fluctuations.
3. Classical economics relates to Classical Dichotomy which is the separation of variables into two groups. The two groups are real which correlate to quantities, relative prices and nominal which is measured in terms of money. Classical economics also relates to the neutrality of money which changes in the money supply and affect nominal, but not real variables. Most economists believe classical theory describes the world in the long run, but not the short run.
4. The Aggregate and Demand curve shows the quantity of all goods and services demanded in the economy at any given price level. The Aggregate & Supply curve shows the total quantity of goods & services firms produce and sell at any given price level.
5. 1. The wealth effect (C falls)
2. The interest-rate effect (I falls)
3.Tthe exchange-rate effect (NX falls)
6. Any event that changes C, I, G, or NX, but not a change in P will shift the AD curve. A stock market boom makes households feel wealthier, C rises, the AD curve shifts right.
7. In Active Learning #2 you have to find what happens to the AD curve in each scenario. In scenario B, NX rises so the Ad curve shifts to the right and in scenario D C rises so the AD curve shifts to the right. In scenario A, I falls which shifts the AD curve to the left. Finally, in scenario C there is a movement along the Ad curve because of the wealth-effect.
8. The LRAS is a vertical line. Any event that changes any of the determinants of YN will shift LRAS. Changes in L or natural rate of unemployment and Changes in K or H will shift the LRAS line
9. Changes in natural rate of unemployment can shift the AD curve. Changes like immigration , Baby-boomers...
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