1. Name two macroeconomic variables that decline when the economy goes into a recession. Name one macroeconomic variable that rises during a recession.
2. List and explain the three reasons the aggregate-demand curve slopes downward.
3. Explain why the long run aggregate supply curve is vertical.
4. What is the theory of liquidity preference? How does it help explain the downward slope of the aggregate-demand curve?
5. Use the theory of the liquidity preference to explain how a decrease in the money supply affects the aggregate-demand curve.
6. Give an example of a government policy that acts as an automatic stabilizer. Explain why the policy has this effect.
7. What is “natural” about the natural rate of unemployment? Why might the natural rate of unemployment differ across countries?
8. Suppose a drought destroys farm crops and drives up the price of food. What is the effect on the short-run trade-off between inflation and unemployment?

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