The Phillips Curve
a. Draw the short-run and long-run Phillips curve. Label three points representing a recessionary gap, an inflationary gap, and full employment output. Identify what happens to the short-run Phillips curve when there is a change in aggregate demand and when there is a change in aggregate supply
/5)
4. Economic Growth
a. Define capital stock. Use the aggregate demand and supply to show the effects of a decrease in interest rates in the short-run and in the long-run. Explain why each curve shifts. Also explain why an increase in consumer spending would not have the same effect in the long-run.
14)
5. Aggregate Production Function
a. Draw the aggregate production function. Explain the difference between movement along the curve and a shift in the curve. Be sure to explain what causes movement along the curve and a shift in the curve.
15)
6. Crowding Out
a. Draw two correctly labeled loanable funds market graphs. Use the graph to explain why crowding out caused by an increase in deficit spending can be showed as either a decrease the supply or an increase in demand.
/5)