1. Using AD-AS diagrams, graphically illustrate and explain how each of the following will affect the overall price level and real GDP in the US in the short run (disregard the self-correcting mechanism). Briefly explain the reason for any shift in AD/AS curve.
a. Consumers expect a recession.
b. Foreign income rises.
c. Workers expect higher inflation and negotiate higher wages now.
d. Dollar appreciates.
e. Interest rate drops.
f. China’s stock market crashes pushing the Chinese economy into a recession.
2. During the Great Depression, the US economy experienced a falling price level and declining real GDP. Using an AD-AS diagram, graphically illustrate and explain how this transpired.
3. From time to time, a concern arises that skyrocketing crude oil prices will contribute to a global stagflation. Using an AD-AS diagram, graphically illustrate and explain how this can transpire.
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