Econ 100C - Economic Fluctuations

left

if the money supply is held constant, then the aggregate demand curve will shift to the ______

long run

in the _____ prices are flexible, output and employment are always at their natural rates, and the classical theory applies.

short run

in the _____ prices are sticky, shocks can push output and employment away from their natural rates

short run

in the ______ many prices are "sticky" at a predetermined level

long run

in the _______ prices are flexible, respond to changes in supply or demand

output to rise

in the short run when prices are sticky, an increase in aggregate demand does what to output?

downward

the aggregate demand curve slopes____

they increase

Starting at a long-run equilibrium, if the AD curve shifts to the right, what happens to prices in the long run?

decrease, return to original price level

a positive supply shock would ________ prices in the short run and __________________in the long run

an oil cartel breaks up and oil prices fall

A favorable supply shock occurs when: -environmental protection laws raise costs of production. -an oil cartel breaks up and oil prices fall. -the Fed increases the money supply. -unions push wages up.

increase, higher

An economy starts in a long-run equilibrium, but then a severe drought kills crops and dramatically increases the price of food. If the Federal Reserve wanted to stabilize the economy and return it back to full employment, it would ________the money supply but prices would forever be _________

output, prices

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 and employment

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

stable, increase

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 increase in the price of oil: Central Bank A should keep the quantity of money ________ whereas Central Bank B should ________ it.

increase, increase

In the AD-AS long-run model, suppose that the velocity of money decreases because of a massive hurricane. How would the Central Bank use the money supply (M) to quickly return to the original level of output? it could ______ M to ____ Y back to its original levels

above

In the aggregate demand-aggregate supply model, if prices increase and output decreases in the transition from the short to long run, then currently equilibrium output is _______ the natural rate of output.

fell, low, declined

In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate ______.

flexible in the long run but sticky in the short run

Most economists believe that prices are:

decreasing the money supply

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by:

downward and to the left

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

increase

if a computer glitch at a credit card company makes stores start accepting only cash payments, the demand for money will ________

keep the economy closer to its natural levels of output and employment

if the Fed responds to an adverse supply shock by expanding the money supply, it will

price level will decrease and output will return to its original level

if the fed keeps the money supply constant, what will happen to output and prices in the long run?

price level is unchanged and output will decrease

if the fed keeps the money supply constant,what will happen to output and prices in the short run?

increase the money supply

if the goal of the fed is to stabilize output what should it do to the money supply?

increase the money supply

if the goal of the fed is to stabilize the price level, what should it do with the money supply?

the adjustment of prices

what moves the economy into its long run equilibrium?

sticky

when prices are ______ output and employment also depend on demand, which is affected by: - fiscal policty (G and T) -monetary policy (M) -other factors, like exogeneous changes in C or I

decreases

when the demand for money increases, the velocity of money _________.

long run supply curve

ybar does not depend on P so this is vertical

horizontal

the short run aggregate supply curve is horizontal, because prices are sticky at predetermined levels

shocks

these are exogeneous changes in aggregate supply or demand

supply shock aka price shock

this alters production costs, affects that prices that firms charge

aggregate demand curve

this curve shows the relationship between the price level and quantitiy of output demanded

aggregate demand and supply

this is a framework to analyze economic fluctuations

the model of aggregate demand and supply

this is used to think about economic fluctuations and policies to stabilize the economy. shows how the price level and aggregate output are determined. and shows how the economy's behavior is different in the short and long run

y bar

this variable denotes the full employment or the natural level of output at which an economy's resources are fully employed. this means that unemployment equals its natural rate (not zero)

prices but not level of output

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

higher, lower

According to the quantity theory of money, if output is higher, ______ real balances are required when velocity is constant, and for fixed M (money supply) this means ______ prices.

prices, quantities

according to classical macroeconomic theory, changes in demand for goods and services (C, I, G) only affect _____, not _______.

output

accoring to classical macroeconomic theory, _____ is determined by the supply side. such as supplies of capital and labor, and technology

real GDP, price level

an expansion in aggregate demand increases _______ in the short run? however in the long run it only increases _________

why the AD curve is downward sloping

an increae in the price level causes a fall in real money balances (M/P), causing a decrease in the demand for goods and services.

rise in price level, output stays the same

an increase in M shifts AD to the right. what does this do to prices and output in the long run?

to the right

an increase in the money supply shifts the AD curve to the

negative demand shock

during this AD shifts to the left, depressing output and employment in the short run. Overtime, pries fall and the economy moves down its demand curve toward full employment

stabilization policy

policy actions aimed at reducing the severity of short run economic fluctuations. an example is using monetary policy to combat the effects of adverse supply shocks.

horizontal

the short run aggregate supply curve is ______. the price level is fixed at a predetermined level, and firms sell as much as buyers demand

examples of adverse supply shocks

some examples of these are: -bad weather reduces crop yieds, pushing up food prices -workers unionize, negotiate wage increases -new environmental regulations require firms to reduce emissions. firms charge higher prices to help cover costs of compliance

true

t or f? favorable supply shocks lower costs and prices

true

t or f? if the money supply is held constant, a decrease in V means people will be using their money in fewer transactions, causing a decrease in the demand for goods and services

true

t or f? shocks temporarily push the economy away from full employment

true

t or f? shocks to aggregate demand and supply cause fluctuations in GDP and employment in the short run

true

t or f? the economy behaves much differently when prices are sticky

vertical

the long run aggregate supply curve is ______, because output depends on technology and factor supplies but not prices

fall

the oil prices shock in the 1970s shifted the SRAS up causing output and employment to _____