Macroeconomics can be a difficult topic to define. For the most part, it can be defined by the specific topics with which it is concerned. Among these are output, inflation, unemployment, interest rates, and international trade. At first these topics may seem unrelated, but some thought shows that they are intimately related. A. The AD/AS model describes changes in the economy by relating real GDP (output) and the price level.
I. Compare and contrast the Keynesian portion of the AD/AS model with the classical portion of the AD/AS model, and explain how the level of production is determined in each situation. Use graphs to explain your answer. (12 points)
II. Compare and contrast changes in aggregate demand and changes in aggregate supply in the AD/AS model. Use graphs to explain your answer.
B. The Phillips curve relates inflation and unemployment.
I. Using the AD/AS model, discuss the changes to the economy that the Phillips curve explains well, and describe under what conditions the Phillips curve fails to explain economic behavior. Include graphs of the Phillips curve and the AD/AS model in your answer.
II. In the late 1990s, the U. S. economy experienced a period of extremely low inflation and extremely low unemployment. Use the AD/AS model to explain what sort of change in the economy would cause this. Include a graphical analysis in your answer, and provide two examples of what might bring about this event.
C. Explain the relationship between interest rates and unemployment. How do changes in the interest rate affect the level of unemployment in the economy?
D. Consider the relationship between interest rates and inflation.
I. Explain the difference between real and nominal interest rates. (9 points)
II. If the Fed takes actions that will change interest rates, how is this likely to affect inflation?