3.
Using an IS –LM diagram, show the effect of an
easy monetary policy on the aggregate demand
curve.
4.
Using an IS –LM diagram, show the effect of
an expansionary fiscal policy on the aggregate
demand curve.
*5.
Explain why an unexpected increase in prices in
the face of sticky wages (i.e., wages that do not
immediately increase in the same proportion as
prices) can explain an upward sloping short-run
aggregate supply curve.
*6.
Suppose that the original long-run and short-run
equilibrium in the economy of Figure 19.3 were
at point C where the AD
curve crosses the LRAS
and SRAS
curves. Explain why a downward shift
in the aggregate demand curve from AD
to AD
would result in a temporary reduction in output
and a permanent reduction in price.
7.
Explain in terms of labor market imperfections
how a downward shift in the aggregate demand
curve would result in a temporary reduction in
output and a permanent reduction in price.
*
= Answer provided at www.wiley.com/college/
salvatore.
8.
Explain how equilibrium in the goods and money
markets and in the balance of payments would
be reached if the LM
curve in the left panel of
Figure 19.5 intersected the IS
curve below the
BP
curve for an economy operating under fixed
exchange rates.
9.
Draw a figure similar to the left panel of
Figure 19.6 showing how equilibrium in the goods
and money markets and in the balance of pay-
ments would be reached if the LM
curve inter-
sected the IS
curve below the BP
curve for an
economy operating under flexible exchange rates.
10.
Examine the effect on the nation’s aggregate
demand curve of an autonomous worsening of a
nation’s trade balance under fixed exchange rates.
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