Exam 10: Introduction to Economic Fluctuations

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. If $M$ increases to 2,000 , what are the new short-run values of $P$ and $Y$ ? c. Once the economy adjusts to long-tun equilibrium at $M = 2,000$ , what are $P$ and $Y$ ?

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

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.

The long-run aggregate supply curve is vertical at the level of output:

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 Macrol and 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?

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

How does recession occur? What is a business cycle?

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:

What is stabilization policy?

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 demand for money increases, this will:

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 decrease in the velocity of money:

If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

Short-run fluctuations in output and employment are called:

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse supply shock in both Country A and Country B. Both countries were in long-run equilibrium at the same level of output and prices at the time of the shock. The central bank of Country A takes no stabilizing policy actions. After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to return the economy to full employment. a. Describe the short-run impact of the adverse supply shock on prices and output in each country. b. Compare the long-run impact of the adverse supply shock on prices and output in each country.

Stabilization policy refers to policy actions aimed at:

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then:

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.

If a change in government regulations allows banks to start paying interest on checking accounts, this will:

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