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Economics 2 Spring 2012 Unit 3
What I expect you to know for the test:
- Why the AD curve slopes down (real balance effect): Pages 120-121.
- What the short-run is in macroeconomics: Pages 130-132.
- Why the short-run aggregate supply curve slopes up: Pages 130-132.
- What causes the SRAS curve to shift and why: Pages 132-134.
- Why the macroeconomic equilibrium is where it is: Pages 134-135.
- The relationship between output and unemployment: Pages 135-137.
- How the short-run macroeconomic equilibrium changes when AD or SRAS curve shifts and how
this affects prices, output, and unemployment: Pages 137-139.
- What the long-run is in macroeconomics: Pages 139-140.
- How wages will change in the long-run and how this will affect the SRAS: Pages 150-152,154-158.
- The long-run equilibrium and the long-run supply curve: Pages 139-141.
- Be able to work through how a shift in the SRAS or AD curve affects the economy in both the
short-run and the long-run: Pages 158-159.
- What the classical economists thought about the likelihood of recessions and their probable length
of recessions (Say’s Law and also adjusting wages): Page 146,149.
- Keynes’ critique of the Classical economists (unspent purchasing power and sticky wages): Pages
- Meaning of Marginal Propensity to Consume (MPC): Pages 170-173.
- How and why the Keynesian multiplier can cause originally small changes in investment,
government, or consumer spending to result in big shifts in the aggregate demand curve (and the
related importance of confidence levels in the economy): Pages 173-175.
- How to construct a table showing the round by round and ultimate total change in I, C, and GDP
started by a change in I: Handout
- How to translate the table into the AS/AD diagram: Pages 176-179.
- How the slope of the SRAS determines the effect of increasing or decreasing AD (increasing AD in
times of recessions and unused resources vs. times of full employment of resources): Pages 176-179.
There is instability due to the characteristic of human nature that a large proportion of our positive
activities depend on spontaneous optimism rather than mathematical expectations, whether moral or
hedonistic or economic. Most, probably, of our decisions to do something positive, the full
consequences of which will be drawn out over many days to come, can only be taken as the result of
animal spirits - a spontaneous urge to action rather than inaction.