Exam 10: Introduction to Economic Fluctuations

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

Monetary policy can be either a stabilizing influence on the economy or a source of instability. Give an explanation for both possibilities.

What is aggregate demand? Why is the aggregate demand curve downward sloping?

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

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run.

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?

Okun's law is the _____ relationship between real GDP and the _____.

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.

Exhibit: Supply Shock Assume that the economy starts at point A, and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point _____ represents the short-run equilibrium immediately following the drought, and point _____ represents the eventual long-run equilibrium.

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

Stabilization policy refers to policy actions aimed at:

If the short-run aggregate supply curve is horizontal and the Bank of Canada increases the money supply, then:

If the Bank of Canada accommodates an adverse supply shock, output falls _____, and prices rise _____.

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.

If the Bank of Canada reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run, and:

Exhibit: Supply Shock In this graph, assume that the economy starts at point A, and there is a favourable supply shock that does not last forever. In this situation, point _____ represents short-run equilibrium, and point _____ represents long-run equilibrium.

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

Most economists believe that prices are:

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