1
What are the variables that cause the AD curve to shift? For each variable,
identify whether an increase in that variable will cause the AD curve to shift to
the right or to the left.
2
Draw a dynamic aggregate demand and aggregate supply graph showing the
economy moving from potential GDP in 2017 to potential GDP in 2018, with no
inflation. Your graph should contain the AD, SRAS and LRAS curves for both
2017 and 2018 and should indicate the short-run macroeconomic equilibrium
for each year and the directions in which the curves have shifted. Identify what
must happen to have growth during 2015 without inflation.
3
Explain how each of the following events would affect the AD curve.
a An increase in the price level
b An increase in government purchases
c Higher income taxes
d Higher interest rates
e Faster income growth in other countries
4
a. Explain why the long-run aggregate supply (LRAS) curve is vertical.
b. Draw a dynamic aggregate demand and aggregate supply graph to illustrate
how it is possible to have real GDP falling below potential GDP between two
time periods at the same time as the price level is rising.
Sample Solution
