Question 1

Define aggregate demand.

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Question 2

Show the impact on the LM curve of an increase in the money supply. Make sure to draw the IS curve and illustrate the impact on the equilibrium interest rate and aggregate output.

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Question 3

Show the impact on the IS curve of an decrease in government spending. Make sure to draw in the LM curve as well and illustrate the impact on the equilibrium interest rate and the aggregate output level.

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Question 4

Explain what the aggregate demand curve is and the relationship between the price level and aggregate output.

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Question 5

Would each of the following cause planned investment to increase or decrease?
(a) Owners of firms become more optimistic about their future sales.
(b) The degree of utilization of a firm's capital stock is very low.
(c) The cost of capital relative to the cost of labor increases.

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Question 6

Draw the IS and LM curve on one graph. Explain the significance of the point of intersection of these two functions.

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Question 7

Explain how capital utilization rates can have an impact on the investment of new capital.

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Question 8

Explain why changes in the goods market may have side effects in the money market.

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Question 9

Explain the role of expectations and "animal spirits" on investment decisions.

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Question 10

Explain the real wealth effect.

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Question 11

Draw the IS curve and explain its shape.

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Question 12

What does each point on the IS curve represent? What does each point on the LM curve represent? Using the IS-LM diagram, explain how equilibrium output is determined. On the graph, illustrate the effect of an increase in the money supply. Explain how this change affects the equilibrium level of output and the interest rate.

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Question 13

List four determinants of planned investment.

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Question 14

Explain how the relative labor and capital costs have an impact on the acquisition of new capital.

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Question 15

In deriving a demand curve for an individual product we invoke the ceteris paribus assumption which includes among other things that income remains fixed. Why can't we use that assumption when it comes to deriving the aggregate demand curve?

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Question 16

Explain why the logic that illustrates why a simple demand curve slopes downward fails to explain why the AD curve also has a negative slope.

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Question 17

Show the impact on the LM curve of an decrease in the money supply. Make sure to draw the IS curve and illustrate the impact on the equilibrium interest rate and aggregate output.

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