Exam 10: Introduction to Economic Fluctuations

A decline in new orders for durable goods is typically an indicator of a future _____ in economic production, and a fall in the average weekly hours in manufacturing is typically an indicator of a future _____ in economic production.

What is the difference between the short run and the long run?

When the French money supply was reduced by 45 percent over a period of seven months in 1724, the only values in the economy that adjusted fully and instantaneously were:

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

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes _____ to the right and gets _____ as it moves farther to the right.

Exhibit: Shift in Aggregate Demand In this graph, initially the economy is at point E, with price P₀ and output Ȳ aggregate demand is given by curve AD₀, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD₁. The economy moves first to point _____ and then, in the long run, to point _____.

Making use of Okun's law, if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

Suppose you are an economist working for the Bank of Canada when droughts in Ontario and floods in Manitoba substantially reduce food production in Canada. Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. State in words what happens to prices and output as a combined result of the supply shock and the recommended Bank of Canada accommodation.

When the Bank of Canada reduces the money supply, at a given price level the amount of output demanded is _____, and the aggregate demand curve shifts _____.

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

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

Stagflation occurs when prices _____ and output _____.

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

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

Exhibit: Supply Shock Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

One of the methods the Bank of Canada uses to change the money supply is open-market operations. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of a Bank of Canada decision to increase open-market purchases. 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 short run refers to a period:

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?

An adverse supply shock _____ the short-run aggregate supply curve _____ the natural level of output.