Exam 10: Introduction to Economic Fluctuations

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:

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 short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

Throughout much of the 1990s, the United States experienced declining energy prices. Assume that the U.S. economy was in long-run equilibrium before these declines began. a. Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this decline on output and prices. b. If the Federal Reserve attempted to offset this deviati on from the natural rate in the short run, should the money supply be increased or decreased?

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

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

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.

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run.

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

On two occasions in the 1970s:

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 fell by 1 percentage point over a year, Okun's law predicts that real GDP would:

Suppose that droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse 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.

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:

Suppose you are an economist working for the Federal Reserve when droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. 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 Federal Reserve accommodation.

Use the following to answer questions : Exhibit: Supply Shock -(Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium.

The aggregate demand curve tells us possible:

Explain the concepts of shocks in aggregate demand and aggregate supply.

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