1. The long-run aggregate supply curve is _____ (vertical/horizontal).
2. A decrease in material costs will shift the short-run aggregate supply _____.
3. Using the long-run aggregate supply curve, a decrease in aggregate demand will _____ prices and _____ output.
4. A negative supply shock, such as higher oil prices, will _____ output and _____ prices in the short run.
5. Higher Gas Prices, Frugal Consumers, and Economic Fluctuations. Suppose gasoline prices increased sharply and consumers became fearful of owning too many expensive cars. As a consequence, they cut back on their purchases of new cars and decided to increase their savings. How would this behavior shift the aggregate demand curve? Using the short-run aggregate supply curve, what will happen to prices and output in the short run?
6. What Caused This Recession? Suppose the economy goes into a recession. The political party in power blames it on an increase in the price of world oil and food. Opposing politicians blame a tax increase that the party in power had enacted. On the basis of aggregate demand and aggregate supply analysis, what evidence should you look at to try to determine what, or who, caused the recession? (Hint: look at the behavior of both prices and output in each case.)
7. Understanding Stagflation. In 1974, oil prices suddenly increased dramatically and the economy experienced an adverse supply shock. Ceteris paribus, what happened to the price level and real GDP? Why is this sometimes called stagflation?
8. China Comes Roaring Back. In the 2008 recession, China was one of the first economies to recover and its GDP growth quickly returned to its pre-recession levels. How did this affect aggregate demand in the rest of the world?
9. Long-Run Effects of a Shock to Demand. Suppose consumption spending rose quickly and then fell back to its normal level. What do you think would be the long-run effect on real GDP of this temporary shock?