Quizzol

QUESTION:

A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another.

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 notion that an increase in the quantity of money will impact the price level but not the output level is known as .

However, in the short run, most economists believe that 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) and aggregate supply (AS) diagram—it needs appropriate labels for the axes and curves. In the questions that follow you will identify some of the missing labels.

The aggregate curve shows the quantity of goods and services that firms produce and sell at each price level.

The horizontal axis of the aggregate demand and aggregate supply model measures the overall .

ANSWER:

A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another.

For example, an increase in the money supply, anominal Correct

variable, will cause the price level, anominal Correct

variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, areal Correct

variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known asmonetary neutrality Correct

Points:

1 / 1

Real variables measure quantities of goods and services, such as the quantity of a particular good or service produced in an economy or the number of units of one good a unit of another good can buy. Nominal variables, such as the quantity of money or the price level, are measured in terms of dollars. Monetary neutrality is the proposition of classical macroeconomic theory that changes in the money supply affect nominal variables but not real variables. Thus, an increase in the money supply will cause the price level and nominal wages to increase proportionately, but real variables, such as the quantity of output, employment, real wages, and real interest rates, will be unaffected. Most economists accept monetary neutrality as a description of how the economy works in the long run, but not in the short run.

The aggregatesupply Correct

curve shows the quantity of goods and services that firms produce and sell at each price level.

Points:

1 / 1

The horizontal axis of the aggregate demand and aggregate supply model measures the overallquantity of output Correct

Points:

1 / 1

The following graph shows the short-run model of aggregate demand and aggregate supply. The price level, a nominal variable, is on the vertical axis, and the quantity of output, a real variable, is on the horizontal axis. The downward-sloping aggregate demand curve shows the quantity of output that governments, consumers, business firms, and foreign customers wish to buy at each price level. The upward-sloping aggregate supply curve shows the quantity of output that firms produce and sell at each price level.

Posted by Cleveland on September 16, 2024