How does the interest rate effect explain the slope of the aggregate demand curve

| April 14, 2018

1. How does the interest rate effect explain the slope of the aggregate demand curve? 2. Explain and illustrate how the short-run and long-run equilibrium levels of output and the price level are affected by successful efforts by the government to reduce the budget deficit. 3. Explain how a change in real wealth can sometimes cause a movement along the aggregate demand curve and how sometimes it can cause a shift of the aggregate demand curve. 4. Classical economists believe that government intervention in the economy is unnecessary to reach full employment. Explain their reasoning. 5. Starting from long-run equilibrium, draw an aggregate demand–aggregate supply graph to illustrate the difference between a long-run and a short-run equilibrium due to an increase in aggregate demand. Once the economy is in the short-run equilibrium, explain—but it’s not necessary to illustrate—how long-run equilibrium will be restored. 6. Explain and illustrate how the short-run and long-run equilibrium levels of output and the price level are affected by legislation that increases the employer’s cost of providing health care to workers. 7. The Great Depression began following a stock market crash and continued as thousands of banks failed; during this time, the government offered little assistance. The government raised taxes and refused to let the money supply increase. Household wealth and expected income both decreased. Using the aggregate demand and aggregate supply model, explain what effect these events had on the economy. 8. Assume that you are a Keynesian economist. You are asked what the government should do if the economy enters a recession. What would you say in response?

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