Be prepared to contrast Keynesian approach with the monetarist's approach on the exam. Remember that the long run aggregate supply curve in the economy is fixed in the short run. It expands due to increase in resources which may be on account of increased labor supply and technological improvements, i.e., productivity. Tax cuts are also thought to increase the aggregate supply by motivating people to work harder.

Keynes believed that when an economy is in a recession, wages are sticky and do not readjust downward. The economy may remain mired in a recession. Thus, increased government spending by way of fiscal deficits may be required to pull an economy out of a recession. Monetarists believe that expanding the money supply can do the same thing by lowering interest rates, increasing aggregate demand for capital goods and spurring the economy back to its full employment level. The effect of monetary policy is indirect through interest rates. But both policies are aimed at increasing aggregate demand.

The CFA institute likes to ask questions that have real world relevance. Outsourcing of many labor jobs to low wage countries has been in the news lately. Think how outsourcing would effect the aggregate supply curve and its implications for future GDP. Furthermore, in the short run, outsourcing leads to higher unemployment which can be linked to frictional and mostly structural unemployment. Do not be surprised if exam questions move you toward thinking in this direction.