Exam 10: Aggregate Demand I: Building the Is-Lm Model

The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock. a. What happens to prices and output in the short run? b. What would happen to prices and output in the long run if there is no policy accommodation? c. If the Central Bank of Macroland wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

The long run refers to a period:

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

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

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

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

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

The relationship between the quantity of output demanded and the aggregate price level is called:

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 version of Okun's law studied in Chapter 10 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:

The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their wealth 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.

If the short-run aggregate supply curve is horizontal, then the:

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. What is the velocity of money in this case? c. Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y? d. What is the velocity of money in this case? e. With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y? f. What is the velocity now?

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

The short run refers to a period:

You are given 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.

A central bank reduces the money supply in an economy initially in long-run equilibrium. a. What will happen to output and prices in the short run? b. What will happen to unemployment in the short run? c. What will happen to output and prices in the long run?

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

Short-run fluctuations in output and employment are called: