# ECO3351 The negative relationship between real GDP (Y) and the Price Level (P)

Q1.

a. Using the quantity equation, derive the negative relationship between real GDP (Y) and the Price Level (P).

b. This negative relationship underlies the aggregate demand (AD) curve. List two factors that shift this curve. Explain how each factor shifts the AD curve.

Q2.

a. Explain why the Classical model is characterized by a vertical aggregate supply (AS) curve. Be sure to explain the important assumption that underlies this vertical relationship.

b. Given this vertical AS curve, explain how the AD-AS framework can be used to depict the quantity theory of money.

c. What policy conclusions follow from the Classical model as far as the need for aggregate demand management is concerned?

Q3.

a. Why is the Keynesian model characterized by a horizontal or upward sloping AS curve? Explain.

b. What is the significance of the upward sloping or horizontal AS curve for the Keynesian model? Explain using a leftward shift of the AD curve.

c. What policy conclusions follow from the Keynesian model as far as the need for aggregate demand management is concerned?

Ch. 2 (Mankiw)

1. Provide an explanation of the circular flow of income and expenditure.

2. Define the construct of Gross Domestic Product (GDP). Does it include all the goods and services produced in an economy? If not, why does it leave out some goods and services? What types of goods are included in GDP calculations? Please answer and explain.

3. Differentiate between GDP and per capital GDP. Similarly, differentiate between nominal and real GDP. When studying economic growth, which metric should we focus on?

4. Provide a brief explanation of the income and expenditure methods for calculating GDP. Focusing on the expenditure method, provide an equation that lists out the different components of GDP and also explain what these different components include.

5. List out and explain three shortcomings of the GDP construct.

6. Explain how the output of governments (at all levels) within a country is calculated while calculating the GDP of a country. Analyze whether the inclusion of government output can distort the meaning of GDP numbers.

7. What is the unemployment rate? What does it seek to measure and how is it calculated?

8. Explain the meaning of the labor force participation rate and explain the differences between the unemployment rate and the labor force participation rate.

Chs. 3 and 7 (Mankiw), Ch. 2 (Snowden and Vane)

1. Provide an explanation of the aggregate production function that defines the production possibilities that are open to firms in an economy in the short run.

2. Use this short run production function and provide an explanation of the law of diminishing returns.

3. In the context of the labor market, explain and differentiate between frictional, structural and cyclical unemployment. Also provide a definition of the natural rate of unemployment.

Chs. 4 and 5 (Mankiw), Ch. 2 (Snowden and Vane)

1. Money is a universal medium of exchange. Explain. In the process, also differentiate between direct and indirect exchange and explain why the process of indirect exchange is welfare-enhancing and more productive.

2. Provide an explanation of the concept of the velocity of circulation of money. Making use of this concept, provide a statement of the Quantity Equation. Explain why the two sides of this equation must always be equal.

3. Making use of the Quantity Equation, state and explain the Quantity Theory of Money.

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