Exam 9: Introduction to Economic Fluctuations

Okun"s law is the relationship between real GDP and the .

You are given the information about the following leading indicators. For each indicator explain whether the information suggests that a recession or expansion should be expected in the future. a. Average initial weekly claims for unemployment insurance rise. b. New building permits issued increases. c. The interest rate spread between the 10-year Treasury note and the 3-month Treasury bill narrows. d. The Index of Supplier Deliveries falls.

The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their income in checking accounts. Use the aggregate demand- aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. 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.

The relationship between the quantity of goods and services supplied and the price level is called:

The version of Okun"s law studied in Chapter 9 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun"s law predicts that real GDP would:

Over the business cycle, investment spending consumption spending.

Explain the meaning of monetary neutrality and illustrate graphically that there is monetary neutrality in the long run in the aggregate demand-aggregate supply model. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. Explain in words what your graph illustrates.

The short run refers to a period:

Short-run fluctuations in output and employment are called:

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:

When the French money supply was reduced by 45 percent in 1724 only fell immediately.

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

In the aggregate demand/aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

According to the quantity theory of money, if output is higher, real balances are required, and for fixed M this means P.

A difference between the economic long run and the short run is that:

The aggregate demand curve tells us possible:

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

The long-run and short-run aggregate supply curves reflect fundamental differences between long-run and short-run macroeconomic analysis. a. Graphically illustrate the long-run and short-run aggregate supply curves. Be sure to label the axes. b. What determines the level of output in the long run versus the short run? c. How do prices behave differently in the long run and the short run?

Stabilization policy: