CH 15 PRACTICE PROBLEMS

1 A recession can be described as:

A short period of falling incomes and rising unemployment

2 What role does investment (I) play in economic fluctuations?

It is only a small part of real GDP, but it actually accounts for a large share of the fluctuation in real GDP ( in fact ~ 2/3 of the decline in GDP during recessions)



3 If an economic contraction is caused by a downward shift ( or decrease) in aggregate demand, how would the economy respond on its own i.e. how would the contraction ‘resolve itself’ without government intervention?

(see 4 steps from notes Ch 15, slides, or class discussion/review)

Summary: With the reduction in AD, over time, there is a fall in the expected price level and costs decline. This leads firms to expand output, shifting the short run aggregate supply curve to the right.
The situation is resolved with a lower price level as output returns to its natural rate.


4 What happens when the short run aggregate supply curve shifts to the left?
(see slides ch15 notes, or graph in class discussion /review)

Summary: A decrease in the short run aggregate supply curve leads to decreased output and higher prices. This situation where there is increasing prices and decreasing output is referred to as ‘Stagflation’.