POST TEST CHAPTER 8

1. [15 points] There are three reasons the aggregate demand curve is downward slo ping.
What are they? Explain each reason!
2. [15 points] What might shift the aggregate supply curve to the left? And explain why
long run aggregate supply is vertical!
3. [30 points] For each of the following events, explain the short-run and long-run ef fects
on output and the price level, assuming policymakers take no action. Analyze with
graphs!
a. Pandemic Covid 19 has caused crash in stock market. After this event, consumer
wealth decrease.
b. The federal government increases spending on national defense.
4. [20 points] What is stagflation? Please show in the graph!
5. [20 points] Suppose economists observe that an increase in government spending of $10
billion raises the total demand for goods and services by $30 billion.
a. If these economists ignore the possibility of crowding out, what would they estimate
the marginal propensity to consume (MPC) to be?
b. Now suppose the economists allow for crowding out. Would their new estimate of the
MPC be larger or smaller than their initial one?