Question

Chapter 14. Question 2.

2. Explaining short-run economic fluctuations Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run. For example, an increase in the money supply, a variable, will cause the price level, a variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a variable. The separation of real variables and nominal variables is known as However, most economists believe that in the short run real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. The following graph shows an incomplete short-run aggregate-demand (AD)/aggregate-supply (AS) diagram-it needs appropriate labels for the axes and curves. You will identify some of the missing labels in the questions that follow.

For example, an increase in the money supply, a (real or nominal?) variable, will cause the price level, a (nominal or real?) variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a (nominal or real?) variable. The separation of real variables and nominal variables is known as (the classical dichotomy, price neutrality, or the quantity theory?).

The horizontal axis of the model of aggregate demand and aggregate supply measures the overall (price level, demand, supply, quantity of output?).

The aggregate (demand or supply?) curve shows the quantity of goods and services that firms produce and sell at each price level.

Answer 1

Blanks-

1) nominal

2) nominal

3) real

4) the classical dichotomy

5) quantity of output

6) supply

Answer 2

1. nominal

2. nominal

3. real

4. the classical dichotomy

5. price level

6. supply
   

Answer 3