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Suppose the economy produces real GDP of $50 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.

A Vertical line is placed on the graph intersecting at (50, 0) The long-run aggregate supply curve is a vertical line at the economy's natural rate of output. The natural rate of output is the level of output consistent with the economy's natural unemployment rate. It is the level of real GDP that the economy gravitates toward in the long run. The long-run aggregate supply curve is vertical at the natural rate of output because the price level has no bearing on the economy's long-run level of real output.

The following table lists several determinants of aggregate demand. Complete the table by indicating the change in each determinant necessary to increase aggregate demand. Change Needed to Increase AD for Consumer expectations about future profitability = __________ Government spending = __________ Expected rate of return on investment = __________ Incomes in other countries = __________

Improve Increase Increase Increase Consumer spending is influenced, in part, by consumer expectations. If households expect strong economic growth and higher earnings, they will spend more today. The increase in current consumption causes an increase in aggregate demand at each price level. Because government purchases are one component of aggregate demand, an increase in government spending causes aggregate demand to increase at each price level. The rate of return that businesses expect on capital projects is a key determinant of investment. Suppose a technological breakthrough causes an increase in the expected return on investment. Investment spending will rise, and aggregate demand will increase at each price level. When the incomes of foreigners increase, foreigners will purchase more domestic products, causing exports to rise. Because net exports are one component of aggregate demand, this increase in net exports (exports minus imports) leads to an increase in aggregate demand at each price level.

Suppose the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. The policy will cause the natural rate of unemployment to , which will: Shift the long-run aggregate supply curve to the right Not affect the long-run aggregate supply curve Shift the long-run aggregate supply curve to the left

Shift the long-run aggregate supply curve to the right The position of the long-run aggregate supply curve depends, in part, on the natural rate of unemployment. A policy that reduces the natural rate of unemployment will cause the long-run aggregate supply curve to shift to the right. For example, a reform that encourages unemployment insurance recipients to find new jobs more quickly would reduce frictional unemployment, thereby reducing the natural rate of unemployment and increasing the economy's productive potential.

Suppose the economy's short-run aggregate supply (AS) curve is given by the following equation: Quantity of Output Supplied = Natural Level of Output+α×(Price LevelActual−Price LevelExpected) The Greek letter αα represents a number that determines how much output responds to unexpected changes in the price level. In this case, assume that α=$2 billionα=$2 billion. That is, when the actual price level exceeds the expected price level by 1, the quantity of output supplied will exceed the natural level of output by $2 billion. Suppose the natural level of output is $60 billion of real GDP and that people expect a price level of 100. On the following graph, use the purple line (diamond symbol) to plot this economy's long-run aggregate supply (LRAS) curve. Then use the orange line segments (square symbol) to plot the economy's short-run aggregate supply (AS) curve at each of the following price levels: 90, 95, 100, 105, and 110 The short-run quantity of output supplied by firms will fall below the natural level of output when the actual price level __________ the price level that people expected.

The correct answer is the LRAS line to be vertical intersecting point (60, 0) The five points are (40, 90), (50, 95), (60, 100), (70, 105), (80, 110) The long-run aggregate supply (LRAS) curve reflects the fact that the money supply and the price level—nominal variables—have no impact on the quantity of goods and services—a real variable—that the economy produces in the long run. The long-run aggregate supply curve is therefore a vertical line at the economy's natural level of output ($60 billion). In the long run, the economy's natural level of output is determined by the size of its labor force, its stocks of human and physical capital, its natural resources, and its technological knowledge. In the short run, the quantity of output supplied by firms fluctuates around the natural level of output when the actual price level turns out to be different from what people expected. For example, an unexpectedly low price level of 90 causes firms to supply a quantity of output less than the natural level of output in the short run. The short-run aggregate supply curve is therefore upward sloping: Quantity of Output SuppliedQuantity of Output Supplied = = Natural Level of Output+α×(Price LevelActual−Price LevelExpected)Natural Level of Output+α×Price LevelActual−Price LevelExpected = = $60 billion+$2 billion×(90−100)$60 billion+$2 billion×90−100 = = $60 billion+(−$20) billion$60 billion+−$20 billion = = $40 billion$40 billion If the actual price level turns out to be equal to what people expected, output will be equal to the natural level of output: Quantity of Output SuppliedQuantity of Output Supplied = = $60 billion+$2 billion×(100−100)$60 billion+$2 billion×100−100 = = $60 billion$60 billion An unexpectedly high price level of 110 causes firms to supply a quantity of output that exceeds the natural level of output in the short run: Quantity of Output SuppliedQuantity of Output Supplied = = $60 billion+$2 billion×(110−100)$60 billion+$2 billion×110−100 = = $60 billion+$20 billion$60 billion+$20 billion = = $80 billion$80 billion Using the same formula for the remaining price levels produces a short-run aggregate supply curve that goes through the coordinates (40, 90); (50, 95); (60, 100); (70, 105); and (80, 110).

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The inflation rate The quantity of physical capital The price level The level of technological knowledge

The inflation rate The price level In the long run, the economy's real GDP depends on labor, capital, natural resources, and technological knowledge. Since changes in the quantity of money do not influence these factors, they do not influence the long-run level of output. If the Fed increases money growth, the price level will rise more quickly, and the inflation rate will increase, but the economy's long-run potential output will not change. In the long run, two related propositions hold: Real and nominal variables are separate (the classical dichotomy), and changes in the quantity of money impact only nominal prices, not production (monetary neutrality).

Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1954? Check all that apply. The unemployment rate declined. Industrial production declined. Consumer spending increased. Home sales declined.

The unemployment rate declined. Consumer spending increased. Most macroeconomic quantities fluctuate together. Recall that real GDP measures the economy's total output and total income simultaneously. A decrease in real GDP, therefore, coincides with declining total income, declining personal income, and falling corporate profits. As incomes decline during a recession, so, too, does consumer spending on retail goods and services and on durable goods, such as automobiles. Households also contribute to declining investment expenditures by purchasing fewer new homes. As households spend less on products, firms cut back on industrial production and curb investment expenditures on physical capital. The unemployment rate tends to rise during periods of falling real GDP as firms cut back on production and lay off workers. The unemployment rate tends to fall during economic expansions as firms expand production and hire additional workers.

The following graph shows an increase in aggregate demand (AD) in a hypothetical country. Specifically, aggregate demand shifts to the right from AD1 to AD2, causing the quantity of output demanded to rise at all price levels. For example, at a price level of 140, output is now $400 billion, where previously it was $300 billion.

The vertical Axis is price level the horizontal axis is the output in billions of dollars AD1 was a line originally from the point (0, 170) to (800, 0)

Which of the following probably occurred as the U.S. economy experienced declining real GDP in 1948? Check all that apply. Total real income declined. Car sales increased. The unemployment rate increased. Consumer spending increased.

Total real income declined. The unemployment rate increased. Most macroeconomic quantities fluctuate together. Recall that real GDP measures the economy's total output and total income simultaneously. A decrease in real GDP, therefore, coincides with declining total income, declining personal income, and falling corporate profits. As incomes decline during a recession, so, too, does consumer spending on retail goods and services and on durable goods, such as automobiles. Households also contribute to declining investment expenditures by purchasing fewer new homes. As households spend less on products, firms cut back on industrial production and curb investment expenditures on physical capital. The unemployment rate tends to rise during periods of falling real GDP as firms cut back on production and lay off workers. The unemployment rate tends to fall during economic expansions as firms expand production and hire additional workers.

The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 120, and the quantity of output demanded is $500 billion. Moving up along the aggregate demand curve from point A to point B, the price level rises to 140, and the quantity of output demanded falls to $300 billion.

Vertical axis is price level from 0 to 170 horizontal axis is output in billions of dollars Horizontal axis is Output in Billions of Dollars from 0 to 800

The following graph shows the aggregate demand (AD) curve in a hypothetical economy. At point A, the price level is 140, and the quantity of output demanded is $300 billion. Moving down along the aggregate demand curve from point A to point B, the price level falls to 120, and the quantity of output demanded rises to $500 billion.

Vertical axis is price level from 0 to 170 horizontal axis is output in billions of dollars Horizontal axis is Output in Billions of Dollars from 0 to 800

The following graph approximates business cycles in the United States from the first quarter of 1953 to the third quarter of 1957. The vertical blue bar coincides with periods of 6 or more months of declining real gross domestic product (real GDP). Notice that real GDP trends upward over time but experiences ups and downs in the short run. A period of declining real GDP, such as the blue-shaded period in 1953, is known as True or False: Short-term fluctuations in real GDP are irregular and unpredictable.

a recession true A recession is a period of declining real GDP. The technical definition of recession is "a period of falling real GDP that lasts 6 months or more." The short-term fluctuations in real GDP are irregular and unpredictable. Recessions may occur close together or farther apart. The duration of recessions varies, and output tends to rise and fall at different rates over time. The ups and downs in real GDP are known as the business cycle, but this term is somewhat misleading because economic fluctuations do not follow a regular cycle.

Suppose the government passes a law that reduces unemployment benefits in a way that causes unemployed workers to seek out new jobs more quickly. The policy will cause the natural rate of unemployment to __________, which will: Shift the long-run aggregate supply curve to the left Not affect the long-run aggregate supply curve Shift the long-run aggregate supply curve to the right

fall Shift the long-run aggregate supply curve to the right The position of the long-run aggregate supply curve depends, in part, on the natural rate of unemployment. A policy that reduces the natural rate of unemployment will cause the long-run aggregate supply curve to shift to the right. For example, a reform that encourages unemployment insurance recipients to find new jobs more quickly would reduce frictional unemployment, thereby reducing the natural rate of unemployment and increasing the economy's productive potential.

As the price level rises, the purchasing power of households' real wealth will _______ , causing the quantity of output demanded to _______ . This phenomenon is known as the _______ effect.

fall fall wealth Households often hold some of their wealth in the form of savings accounts or cash. As the price level rises, the purchasing power of this wealth falls because the money will purchase less of the (now higher-priced) goods. According to the wealth effect, increases in the price level decrease the quantity of output demanded.

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The size of the labor force The price level The level of technological knowledge The quantity of physical capital

the price level In the long run, the economy's real GDP depends on labor, capital, natural resources, and technological knowledge. Since changes in the quantity of money do not influence these factors, they do not influence the long-run level of output. If the Fed increases money growth, the price level will rise more quickly, and the inflation rate will increase, but the economy's long-run potential output will not change. In the long run, two related propositions hold: Real and nominal variables are separate (the classical dichotomy), and changes in the quantity of money impact only nominal prices, not production (monetary neutrality).

In the short run, the quantity of output that firms supply can deviate from the natural level of output if the actual price level in the economy deviates from the expected price level. Several theories explain how this might happen. For example, the sticky-price theory asserts that the output prices of some goods and services adjust slowly to changes in the price level. Suppose firms announce the prices for their products in advance, based on an expected price level of 100 for the coming year. Many of the firms sell their goods through catalogs and face high costs of reprinting if they change prices. The actual price level turns out to be 90. Faced with high menu costs, the firms that rely on catalog sales choose not to adjust their prices. Sales from catalogs will __________ , and firms that rely on catalogs will respond by __________ the quantity of output they supply. If enough firms face high costs of adjusting prices, the unexpected decrease in the price level causes the quantity of output supplied to __________ the natural level of output in the short run.

fall reducing fall below According to the sticky-price theory, the short-run aggregate supply curve slopes upward because the prices of some products adjust slowly to economic conditions. Some firms set prices for prolonged periods of time because they face high menu costs when prices are adjusted frequently. If the price level turns out to be lower than people expected, the prices of products of firms with more flexible pricing options will be low compared to the prices of products of firms that face high menu costs. Firms with rigid prices will see their sales decline and will cut back on production. An unexpectedly high price level has the opposite effect. Flexible firms will adjust their prices upward, while prices at sticky-price firms will lag behind. Sticky-price firms will see their sales increase because of their relatively low prices, causing them to increase production.

Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to ______ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore______ , and the number of foreign products purchased by domestic consumers and firms (imports) will______ . Net exports will therefore______ , causing the quantity of domestic output demanded to______ . This phenomenon is known as the______ effect.

fall rise fall rise rise exchange rate When an economy's price level falls, consumers require less money to purchase a given basket of goods and services, so that money demand falls, causing the domestic interest rate to fall. Investors respond to lower domestic interest rates by seeking higher returns abroad. As domestic investors attempt to convert dollars into foreign currency to buy foreign assets, the supply of dollars increases in the market for foreign-currency exchange, and the real value of the dollar falls. When each dollar buys fewer units of foreign currencies, foreign goods become more expensive than domestic goods. Because of dollar depreciation, foreigners find domestic goods to be relatively inexpensive. Exports of domestic goods to foreigners therefore rise, while domestic imports of foreign goods fall. Net exports (exports minus imports) therefore rise, leading to a rise in the quantity of domestic output demanded. The tendency for a fall in the price level to decrease the real exchange rate and increase net exports is known as the exchange rate effect.

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift: Many workers leave to pursue more lucrative careers in foreign economies. = _________ For environmental and safety reasons, the government requires that the country's nuclear power plants be permanently shut down. = __________ An investment tax credit increases the rate at which firms acquire machinery and equipment. = __________

left left right If many workers leave the economy to pursue better job opportunities elsewhere, the size of the labor force contracts, and the economy's productive potential declines. The long-run aggregate supply curve shifts to the left. A ban on the use of nuclear energy is similar to a reduction in technological knowledge or a reduction in natural resources. By eliminating a source of energy, the ban reduces the economy's productive potential, causing the long-run aggregate supply curve to shift to the left. Keep in mind that the government must balance the environmental benefits of passing regulations with the costs associated with limiting the economy's potential output. An investment tax credit that increases physical capital accumulation will increase the economy's productive potential, shifting the long-run aggregate supply curve to the right.

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

nominal nominal real monetary neutrality 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.

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 distinction between real variables and nominal variables is known as _________ .

nominal nominal real the classical dichotomy 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. The classical dichotomy is the separation of economic variables into real variables (those that measure quantities or relative prices) and nominal variables (those measured in terms of money).

In the short run, however, 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. You will identify some of the missing labels in the questions that follow. The vertical axis of the aggregate demand and aggregate supply model measures the overall _________. The aggregate __________ curve shows the quantity of output that households, firms, the government, and foreign customers want to buy at each price level.

price level demand 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. there is a graph the vertical axis is the price level the horizontal axis is the quantity of output There are two lines that form an x on the graph the one increasing is the Aggregate supply curve the one decreasing is the Aggregate demand curve.

In the short run, however, 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. You will identify some of the missing labels in the questions that follow. The horizontal axis of the aggregate demand and aggregate supply model measures the overall _______ . The aggregate __________ curve shows the quantity of goods and services that firms produce and sell at each price level.

quantity of output supply 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. there is a graph the vertical axis is the price level the horizontal axis is the quantity of output There are two lines that form an x on the graph the one increasing is the Aggregate supply curve the one decreasing is the Aggregate demand curve.

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift The government allows more immigration of working-age adults who find work. This economy's primary source of foreign oil decides to cease exports for political reasons. A natural disaster destroys a significant amount of the economy's production facilities.

right left left Loosening immigration restrictions will increase the size of the labor force and the economy's productive ability. An increase in labor shifts the long-run aggregate supply curve to the right. If an economy depends on imports from foreign countries for its oil, a politically motivated oil embargo acts like a reduction in natural resources. The reduced availability of natural resources shifts the long-run aggregate supply curve to the left. A serious natural disaster can reduce the economy's stock of physical capital, such as factories, plants, office buildings, and heavy machinery. The reduction in capital reduces the economy's productive potential, shifting the long-run aggregate supply curve to the left.

In the following table, determine how each event affects the position of the long-run aggregate supply (LRAS) curve. Direction of LRAS Curve Shift The government allows more immigration of working-age adults who find work. A scientific breakthrough significantly increases food production per acre of farmland. A government-sponsored training program increases the skill level of the workforce.

right right right Loosening immigration restrictions will increase the size of the labor force and the economy's productive ability. An increase in labor shifts the long-run aggregate supply curve to the right. An improvement in technological knowledge that boosts agricultural yields enables farmers to get more output from an existing level of natural resources. It will increase the productive potential of the economy, shifting the long-run aggregate supply curve to the right. An effective training program will increase the skill level of the workforce, boosting the economywide stock of human capital. A more knowledgeable workforce will produce more goods and services. The increase in human capital shifts the long-run aggregate supply curve to the right.

As the price level rises, the cost of borrowing money will ______ , causing the quantity of output demanded to ______ . This phenomenon is known as the ___________ effect.

rise fall interest rate If the price level rises, people will need more money to carry out day-to-day transactions. As people demand more money, the cost of borrowing money—the interest rate—will rise (assuming that the quantity of money in the economy is fixed). As a result, business investment slows, leading to a decreased demand for domestic output. This is known as the interest rate effect of a change in the price level. Note that a higher interest rate decreases not only investment spending, but also consumer spending, as people will want to save more. So, at a higher interest rate, business investment decreases and household saving increases, leading to a decreased demand for domestic output.

Suppose the government passes a law that significantly increases the minimum wage. The policy will cause the natural rate of unemployment to , which will: Shift the long-run aggregate supply curve to the right Shift the long-run aggregate supply curve to the left Not affect the long-run aggregate supply curve

rise Shift the long-run aggregate supply curve to the left The position of the long-run aggregate supply curve depends, in part, on the natural rate of unemployment. A policy that increases the natural rate of unemployment will cause the long-run aggregate supply curve to shift to the left. For example, a sharp increase in the minimum wage will increase structural unemployment, thereby raising the natural rate of unemployment and reducing the economy's productive potential.

Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to ______ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore ______ , and the number of foreign products purchased by domestic consumers and firms (imports) will ______ . Net exports will therefore ______ , causing the quantity of domestic output demanded to ______ . This phenomenon is known as the ____________ effect.

rise fall rise fall fall exchange rate When an economy's price level rises, consumers require more money to purchase a given basket of goods and services, so that money demand rises, causing the domestic interest rate to rise. Foreign investors respond to higher domestic interest rates by seeking higher returns in the domestic economy. As foreign investors attempt to convert foreign currency into dollars to buy domestic assets, the demand for dollars increases in the market for foreign-currency exchange, and the real value of the dollar rises. When each dollar buys more units of foreign currencies, foreign goods become less expensive than domestic goods. Because of dollar appreciation, foreigners find domestic goods to be relatively more expensive. Exports of domestic goods to foreigners therefore fall, while domestic imports of foreign goods rise. Net exports (exports minus imports) therefore fall, leading to a fall in the quantity of domestic output demanded. The tendency for a rise in the price level to increase the real exchange rate and decrease net exports is known as the exchange rate effect.

Additionally, as the price level rises, the impact on the domestic interest rate will cause the real value of the dollar to _______ in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore _______ , and the number of foreign products purchased by domestic consumers and firms (imports) will _______ . Net exports will therefore _______ , causing the quantity of domestic output demanded to _______ . This phenomenon is known as the _______ effect.

rise fall rise fall fall exchange rate When an economy's price level rises, consumers require more money to purchase a given basket of goods and services, so that money demand rises, causing the domestic interest rate to rise. Foreign investors respond to higher domestic interest rates by seeking higher returns in the domestic economy. As foreign investors attempt to convert foreign currency into dollars to buy domestic assets, the demand for dollars increases in the market for foreign-currency exchange, and the real value of the dollar rises. When each dollar buys more units of foreign currencies, foreign goods become less expensive than domestic goods. Because of dollar appreciation, foreigners find domestic goods to be relatively more expensive. Exports of domestic goods to foreigners therefore fall, while domestic imports of foreign goods rise. Net exports (exports minus imports) therefore fall, leading to a fall in the quantity of domestic output demanded. The tendency for a rise in the price level to increase the real exchange rate and decrease net exports is known as the exchange rate effect. Try Another Version Continue

As the price level falls, the purchasing power of households' real wealth will ______ , causing the quantity of output demanded to ______ . This phenomenon is known as the ________ effect.

rise rise wealth Households often hold some of their wealth in the form of savings accounts or cash. As the price level falls, the purchasing power of this wealth rises because the money will purchase more of the (now lower-priced) goods. According to the wealth effect, decreases in the price level increase the quantity of output demanded.

The following graph approximates business cycles in the United States from the first quarter of 1947 to the third quarter of 1951. The vertical blue bar coincides with periods of 6 or more months of declining real gross domestic product (real GDP). Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as True or False: Small ups and downs in real GDP follow a consistent, predictable pattern.

the business cycle False Economic fluctuations correspond closely to business conditions: Most businesses do well during periods of expansion, and most businesses do poorly during periods of falling real GDP. The short-term fluctuations in real GDP are irregular and unpredictable. Recessions may occur close together or farther apart. The duration of recessions varies, and output tends to rise and fall at different rates over time. The ups and downs in real GDP are known as the business cycle, but this term is somewhat misleading because economic fluctuations do not follow a regular cycle.

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? Check all that apply. The quantity of physical capital The price level The level of technological knowledge The inflation rate

the price level the inflation rate In the long run, the economy's real GDP depends on labor, capital, natural resources, and technological knowledge. Since changes in the quantity of money do not influence these factors, they do not influence the long-run level of output. If the Fed increases money growth, the price level will rise more quickly, and the inflation rate will increase, but the economy's long-run potential output will not change. In the long run, two related propositions hold: Real and nominal variables are separate (the classical dichotomy), and changes in the quantity of money impact only nominal prices, not production (monetary neutrality).

Suppose the economy produces real GDP of $60 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.

vertical line intersecting on (60, 0) The long-run aggregate supply curve is a vertical line at the economy's natural rate of output. The natural rate of output is the level of output consistent with the economy's natural unemployment rate. It is the level of real GDP that the economy gravitates toward in the long run. The long-run aggregate supply curve is vertical at the natural rate of output because the price level has no bearing on the economy's long-run level of real output.

Suppose the economy produces real GDP of $70 billion when unemployment is at its natural rate. Use the purple points (diamond symbol) to plot the economy's long-run aggregate supply (LRAS) curve on the graph.

vertical line intersecting point (70, 0) The long-run aggregate supply curve is a vertical line at the economy's natural rate of output. The natural rate of output is the level of output consistent with the economy's natural unemployment rate. It is the level of real GDP that the economy gravitates toward in the long run. The long-run aggregate supply curve is vertical at the natural rate of output because the price level has no bearing on the economy's long-run level of real output.