Exam 10: Introduction to Economic Fluctuations

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

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

If the Fed 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:

The short run refers to a period:

Stagflation occurs when prices ______ and output ______.

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 = 3(M/P) and M = 1,000. a. If the economy is initially in long-tun equilibrium, what are the values of $P$ and $Y$ ? b. Now suppose a supply shock moves the short-run aggregate supply curve to $P = 1.5$ . What are the new short-run $P$ and $Y$ ? c. If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibrium $P$ and $Y$ after the supply shock? d. Suppose that after the supply shock the Fed wanted to hold output at its long-tun level. What level of $M$ would be required? If this level of $M$ were maintained, what would be long-tun equilibrium $P$ and $Y$ ?

Use the following to answer questions : Exhibit: Shift in Aggregate Demand -(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with the price P₀ and output Y. 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 AD₂. The economy moves first to point ______ and then, in the long run, to point ______.

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

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.

The long run refers to a period:

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

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.

A favorable supply shock occurs when:

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

Use the following to answer questions : Exhibit: Supply Shock -(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.

The principal method used by the Federal Reserve to change the money supply is through 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 Federal Reserve 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.

Use the following to answer questions : Exhibit: Supply Shock -(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:

What is the relationship between unemployment and real GDP? Explain Okun's law.

The short-run aggregate supply curve is horizontal at:

A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____.