REVIEW QUESTIONS

3. What relationship does the LM curve capture? Derive the LM curve graphically and show why it slopes as it does. Give two examples of changes in the econ­omy that would cause the LM curve to shift down and to the right.

4. For constant output, if the real money supply exceeds the real quantity of money demanded, what will hap­pen to the real interest rate that clears the asset market?

In describing the adjustment of the real interest rate, use the relationship that exists between the price of a nonmonetary asset and the interest rate that it pays.

5. Define general equilibrium and show the general equi­librium point in the IS-LM diagram. If the economy isn't in general equilibrium, what determines output and the real interest rate? What economic forces act to bring the economy back to general equilibrium?

6. Define monetary neutrality. Show that, after prices adjust completely, money is neutral in the IS-LM model. What are the classical and Keynesian views about whether money is neutral in the short run? In the long run?

7. What two variables are related by the aggregate demand (AD) curve? Why does the AD curve slope downward? Give two examples of changes in the economy that shift the AD curve up and to the right and explain why the shifts occur.

8. Describe the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve. Why is one of these curves horizontal and the other vertical?

9. Use the AD-AS framework to analyze whether money is neutral in the short run and whether it is neutral in the long run.

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