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Question 1

 

For each of the following, explain whether it shifts the short-run aggregate supply curve, the long-run aggregate supply curve, or the aggregate demand curve (or more than one of these).

a. Households decide to save a smaller share of their disposable income.

b. There is an 8-week strike in the steel industry.

c. A drought in the Midwest causes poor wheat harvest.

d. The labor force participation rate increases.

Question 2

 

Suppose MPC is 0.8 initially. Households then change their behavior so that the MPC falls to 0.75. What happens to aggregate expenditures? Why?

Question 3

 

What is a consumption function? Describe the graph of a consumption function and explain its shape. If total spending is consumption plus investment spending, how does an increase in the interest rate affect total spending?

Question 4

 

How is an aggregate demand curve derived? What would cause the aggregate demand curve to shift to the right?

Question 5

Explain what would cause the government purchases function to increase. Will a change in social security spending affect government purchases?

Your response should be at least 75 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.

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