Download Keynesian and Classical

AGGREGATE-DEMAND AND AGGREGATE-SUPPLY MODELS
NAME:_________________________________
1) Draw appropriately labeled graphs for the New Keynesian, New Classical, and Brunelle AS/AD
models. Show the equilibrium price level and full-employment GDP for each.
2) What are the four main beliefs of classical economists? What are the four main beliefs of
Keynesian economists?
3) Using the New Keynesian model, show:
a) An instance in which AD increases, but the price level does not change.
b) An instance in which AD increases, but real GDP does not change.
c) An instance in which AD increases, and both real GDP and the price level change.
4) Using the Brunelle model, show an instance in which aggregate demand initially increases so
that the equilibrium GDP (in the short run) is beyond full-employment real GDP. Show what
then happens to the SRAS curve, LRAS curve, equilibrium price level, and equilibrium GDP.
5) Draw a Keynesian AS/AD model and a production-possibilities curve. Label points “K”, “I”, and
“C” on both graphs to represent the Keynesian, intermediate, and classical portions of the
graph, respectively.
6) Assume that weaker business expectations lower investment demand. Show how this affects
both the aggregate-expenditures model and the aggregate demand curve. Show the aggregate
demand curve on its own graph, but you need not show an aggregate supply curve. Make sure
that the graphs are appropriately labeled. You may show an arbitrarily defined price level.
Show that
and and are equal for the two graphs. For the aggregate demand curves, show
an original, one that follows the initial decrease in investment spending, and one that follows
the work of the multiplier.
7) Use the Brunelle model to show each of the following scenarios. Make sure to label
appropriately:
a) The economy is in equilibrium at full-employment GDP. SRAS, LRAS, and AD intersect at the
same point. Suddenly, AD increases. Show what happens if we assume that wages do not
have time to adjust.
b) Use the same information in (a), but show what happens if wages do have time to adjust.
c) SRAS decreases due to an increase in oil prices, but long-term production capacity remains
constant. What term refers to this scenario?
d) AD decreases along the Keynesian range.
e) Use the New Classical Model, and assume the economy is initially at
Assume that the SRAS curve can shift in response to changes in AD.
. AD decreases.
f)
A means of teleportation is devised, making production more efficient in all industries. Use
the Brunelle model to show what happens to the economy. Assume that this change in
efficiency can affect aggregate demand, short-run aggregate supply, and long-run aggregate
supply (either directly or indirectly).
8) Use the Brunelle model and a corresponding production-possibilities curve to show an economy
that is currently operating beyond full-employment real GDP.