Macro Chap. 10

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

negative; unemployment rate

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

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

prices; output

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.

real

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

rise in the short run but return to its original equilibrium level in the long run.

Exhibit: Supply Shock Assume that the economy starts at point A, and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought, and point ______ represents the eventual long-run equilibrium.

B; A

The short run refers to a period:

during which prices are sticky and cyclical unemployment may occur.

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______, and output will ______.

increase; decrease

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices.

An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output.

raises; and may also lower

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

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

return to the old level, and output will be restored to the natural rate.

Exhibit: Shift in Aggregate Demand In this graph, initially the economy is at point E, with price P0 and output aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______.

C; B

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.

E; A

Exhibit: Shift in Aggregate Demand Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity.

increase; increase

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.

only output; only prices

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run.

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.

output; prices