Exam 9: Introduction to Economic Fluctuations

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500. A) If the economy is initially in long-run equilibrium, what are the values of P and Y? B) If M increases to 2,000, what are the new short-run values of P and Y? C) Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are generating a quantity of output demanded.

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

If the short-run aggregate supply curve is horizontal, then a change in the money supply will change in the short run and change in the long run.

A short-run aggregate supply curve shows fixed , and a long-run aggregate supply curve shows fixed .

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will and output will .

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

Suppose that droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse supply shock in both Country A and Country B. Both countries were in long-run equilibrium at the same level of output and prices at the time of the shock. The central bank of Country A takes no stabilizing-policy actions. After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to return the economy to full employment. a. Describe the short-run impact of the adverse supply shock on prices and output in each country. b. Compare the long-run impact of the adverse supply shock on prices and output in each country.

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

Alan Blinder"s survey of firms found that the theory of price stickiness accepted by the most firms was:

Suppose that laws are passed banning labor unions and that resulting lower labor costs are passed along to consumers in the form of lower prices. Use the aggregate demand- aggregate supply model to illustrate graphically the impact in the short run and the long run of this favorable supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

When GDP growth declines, investment spending typically and consumption spending typically .

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then increase(s) in the short run and increase(s) in the long run.

The aggregate demand curve is the relationship between the quantity of output demanded and the .

Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long run.

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is the natural rate of output in the short run.

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about in advance.

Looking at the aggregate demand curve alone, one can tell that will prevail in the economy.

Alan Blinder"s survey of firms found that the typical firm adjusts its prices: