1. An aggregate demand curve (how does it differ from a regular demand curve)
2. An aggregate supply curve

2.     Given two aggregate demand curves, AD1 and AD2, where money stock associated with AD1 is less than that associated with AD2, explain in words without using mathematics, why AD2 must lie to the right of AD1.

3.     What is meant by the assumption that workers do not suffer from a money illusion? What does it mean if we assume that consumers do not suffer from a money illusion?

4.     Why is the existence or nonexistence of money illusion in an economy important in analyzing the effectiveness of fiscal and monetary policies?

5.     Assume that wages are perfectly flexible and that there exists an aggregate production function that is of the form:

1. Explain how we obtain a perfect inelastic aggregate supply curve from this. What assumption(s) are we making about the labor supply curve?
2. How is this aggregate supply curve affected by changes in: (i) prices, (ii) technology, (iii) the size of the labor force.
3. Investigate your answer to part (a) by drawing demand and supply curves for labor in two different diagrams. (One set in each diagram.) In the first diagram, label the vertical axis W / P; in the second diagram, label the vertical axis W. Assume that there is no money illusion in both cases. What happens in both diagrams (different things may happen) if price rises?

6.     Explain carefully (graph, words and, if you wish, calculus) what happen to aggregate output, interest rates and the price level if the following changes occur. In each case explain why there may be shifts in demand and/or supply by going back to IS, LM and /or the labor market curves.

1. An increase in the nominal money supply
2. A decrease in government expenditure
3. A decrease in the autonomous portion of investment
4. An increase in the labor supply
5. An increase in the autonomous portion of taxes

7.     What does the aggregate supply curve look like if nominal wages are inflexible downward below some given level? Why does it look like that?

8.     Do question number 4 above for the aggregate supply curve from question number 5.

9.     Assume that workers maximize their utility function with leisure and labor income after tax as arguments, use a simple ISLM model with production sector to trace the impact of an increase in tax on the level of income, employment, prices, and interest rate.

10.     With the aid of a three sector model (one which includes product market, money market, and factor market), recommend stabilization policies for dealing with inflation which will not alter aggregate private domestic investment. Specify the characteristics of your model clearly.