ECON 151

Prepare: Chapter 13
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In order to get full credit, answer all questions in either bold font or red font.
Read Chapter 13 in the Hubbard/O’Brien text.

1. Define the aggregate demand (AD) and aggregate supply (AS) model. Define the AD curve and
the short-run aggregate supply (SRAS) curve.

2. Briefly explain each the three reasons that real GDP responds to a change in the price level. (The
Wealth Effect; The Interest Rate Effect; The International Trade Effect)

3. Briefly describe each of the categories of variables that shift the aggregate demand curve

4. Define monetary policy and fiscal policy

5. What is the long-run aggregate supply (LRAS) curve? In the long run, what determines the level
of real GDP?

6. Why is LRAS a vertical line? What typically happens each year to LRAS in the US, and why
does that happen? (See Figure 13.2)

7. Why is the SRAS curve upward sloping? What are the two key reasons that explain this?

8. List the five main variables that shift SRAS and indicate whether an increase in each variable
causes SRAS to increase or decrease. (See Table 13.2)

9. What is a recession, and how is it illustrated using the AD-AS model? How does an economy
automatically adjust back to potential GDP in the long run after experiencing a recession?

10. What is an economic expansion, and how is it illustrated using the AD-AS model? How does an
economy automatically adjust back to potential GDP in the long run after experiencing an
expansion?

11. What is a supply shock? What are the short-run and long-run effects of a supply shock? (See
Figure 13.7)