1) Suppose the economy is in a long run equillibrium.

a. draw a diagram to illustrate the state of the economy. Be sure to show aggregate deman, short run aggregate supply, and long run aggregate supply.

b. Now suppose that a stock market crash causes aggregate demand to fail. Use your diagram to show what happens to output and then price level in the short run. what happens to the unemployment rate?

c. Use the sticky-wage theory of aggregate supply to explain what will happen to output and the price level in the long run (assuming there is no change in policy) Be sure to illustrate your analysis in a graph.

2) In 1939, with the U.S economy not yet fully recovered from the great depresion, President Roosevelt proclaimed that Thanksgiving would fall a week earlier than usual so that the shopping period before Chirstmas would be longer. Explain what President Roosevelt might have been trying to achieve, using the model of aggregate demand and Aggregate supply.

3) For each of the following events, explain the short run and long effects on output and the price level, assuming polycimakers take no action.

a. the federal goverment increases spending on national defense

b. A technological improvement raises productivity.

c. A recession overseas causes foreigners to buy fewer U.S goods.