I do not have all of the graphs in the answer key, but you need to be sure to always include graphs in your answers. The current state of the economy is shown in the figure above. The aggregate-demand curve and short-run aggregate-supply curve intersect at the same point on the long-run aggregate-supply curve.

A stock market crash leads to a leftward shift of aggregate demand. The equilibrium level of output and the price level will fall.

Because the quantity of output is less than the natural rate of output, the unemployment rate will rise above the natural rate of unemployment. If nominal wages are unchanged as the price level falls, firms will be forced to cut back on employment and production.

Over time as expectations adjust, the short-run aggregate-supply curve will shift to the right, moving the economy back to the natural rate of output. The current state of the economy is shown in the figure below. If the central bank increases the money supply, aggregate demand shifts to the right to point B. In the short run, there is an increase in output and the price level.

Over time, nominal wages, prices, and perceptions will adjust to this new price level. As a result, the short-run aggregate-supply curve will shift to the left. The economy will return to its natural rate of output point C.

According to the sticky-wage theory, nominal wages at points A and B are equal. However, nominal wages at point C are higher. According to the sticky-wage theory, real wages at point B are lower than real wages at point A. However, real wages at points A and C are equal.

Yes, this analysis is consistent with long-run monetary neutrality. In the long run, an increase in the money supply causes an increase in the nominal wage, but leaves the real wage unchanged.

People will likely expect that the new chairman will not actively fight inflation so they will expect the price level to rise.

If people believe that the price level will be higher over the next year, workers will want higher nominal wages. A decline in short-run aggregate supply leads to reduced output and a higher price level.

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No, this choice was probably not wise. The end result is stagflation, which provides limited choices in terms of policies to remedy the situation. If households decide to save a larger share of their income, they must spend less on consumer goods, so the aggregate-demand curve shifts to the left, as shown in Figure. The equilibrium changes from point A to point B, so the price level declines and output declines. If Florida orange groves suffer a prolonged period of below-freezing temperatures, the orange harvest will be reduced.

This decline in output is represented by a shift to the left in the short-run aggregate-supply curve. If increased job opportunities cause people to leave the country, the long-run and shortrun aggregate-supply curves will shift to the left because there are fewer people producing output. The aggregate-demand curve will shift to the left because there are fewer people consuming goods and services.

The result is a decline in the quantity of output, as Figure 14 shows. Whether the price level rises or declines depends on the relative sizes of the shifts in the aggregate-demand curve and the aggregate-supply curves.

When the stock market declines sharply, wealth declines, so the aggregate-demand curve shifts to the left, as shown in Figure In the short run, the economy moves from point A to point B, as output declines and the price level declines.

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In the long run, the short-run aggregate-supply curve shifts to the right to restore equilibrium at point C, with unchanged output and a lower price level compared to point A. When the federal government increases spending on national defense, the rise in government purchases shifts the aggregate-demand curve to the right, as shown in Figure In the short run, the economy moves from point A to point B, as output and the price level rise. In the long run, the short-run aggregate-supply curve shifts to the left to restore equilibrium at point C, with unchanged output and a higher price level compared to point A.

When a technological improvement raises productivity, the long-run and short-run aggregate-supply curves shift to the right, as shown in Figure In the short run, the economy moves from point A to point B, as output rises and the price level declines. In the long run, the short-run aggregate-supply curve shifts further to the right to restore equilibrium at point C, with output higher and the price level lower compared to point A.

When a recession overseas causes foreigners to buy fewer U.