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Chapter 8 Test Review Here is a brief review of the key points in this chapter. You should ADDITIONALLY read the chapter in its entirety. Do not expect to reach a high score without doing any work outside of class! Business Cycle • Be able to draw a correctly labelled graph of the business cycle • Be able to identify the four specific phases of the business cycle • Be able to discuss the relationship between unemployment, inflation and real GDP at each phase of the business cycle • Be able to define and differentiate between actual real GDP and potential GDP Aggregate Demand (AD) • Be able to define AD, identify the components of AD, and draw a correctly labelled graph of AD • Be able to explain why the AD curve is downward sloping • Be able to differentiate between a movement along the AD curve and a shift of the AD curve Aggregate Supply (AS) and Short-Run Aggregate Supply (SRAS) • • • • • Be able to define AS, and draw a correctly labelled graph of SRAS Be able to explain why the SRAS curve is upward sloping Be able to differentiate between a movement along the SRAS curve and a shift of the SRAS curve Be able to distinguish between the short run and long run as it pertains to AS Be able to distinguish between positive and negative supply shocks and how the SRAS curve reacts to both events • Be able to draw a correctly labelled graph including an AD curve, an SRAS curve, a potential real GDP line, and identify how recessionary and inflationary gaps can exist in the short run Long-Run Aggregate Supply (LRAS) Curve and the Neo-Classical Perspective • Be able to define what the LRAS curve shows us • Be able to draw a correctly labelled graph of an economy at long-run macroeconomic equilibrium with a neo-classical LRAS • Be able to explain how a change in AD can lead to inflationary and/or recessionary gaps in the shortrun, but not in the long-run • Be able to explain the key point as to why neo-classicists believe the economy will always return to potential full employment real GDP • Be able to explain how neo-classicists believe an economy can achieve economic growth over time • Be able to explain what neo-classicists believe the role of government should be in economic policy making Long-Run Aggregate Supply (LRAS) Curve and the Keynesian Perspective • Be able to discuss why neo-classicists and Keynesians disagree about the shape of the LRAS curve and why they disagree about the economy always achieving macroeconomic equilibrium in the long-run • Be able to draw a Keynesian LRAS curve and identify the three segments of the curve • Be able to draw a correctly labelled graph showing a recessionary and inflationary gap in the Keynesian perspective • Be able to explain what Keynesians believe the role of government should be in economic policy making • Be able to explain how Keynesians believe an economy can achieve economic growth over time