Answer Happy

4. Answer all parts (a)-(d) of this question. (a) [8 marks] Explain how it is possible to obtain a positively sloped short-run aggregate supply function from the "sticky price" model. (b) [4 marks] Provide one explanation for the negative relationship between the aggregate price level and the aggregate output implied by an aggregate demand function. (c) [6 marks] In a diagram, draw the AD-AS model with fixed prices in the short-run. Starting from long-run equilibrium, suppose that there is a negative shock on the aggregate demand. Explain the short-run and long-run effects of this negative demand shock. (d) [7 marks] Now suppose that the short-run aggregate supply is positively sloped. Explain the short-run and long-run effects of a negative demand shock paying attention to the role of expectation. Compare your answer with case (c).