ECN 211 ASU Exam 3 UPDATED ACTUAL QUESTIONS AND CORRECT ANSWERS
Recession -a period of mildly falling incomes and rising unemployment ex. 2007-2009
-caused by a leftward shift in aggregate demand and a leftward shift in aggregate
supply
Depression a severe period of falling incomes and rising unemployment ex. Great Depression
, The Business Cycle the short-run fluctuations of the economy
Economic Fluctuations -are irregular and unpredictable
-most macroeconomic variables measuring income, spending, or production
move in the same direction
When Output Falls, Unemployment Rises when real GDP declines the rate of unemployment rises because when firms
produce fewer goods and services, they lay off workers
Classical Dichotomy -the separation of economic variables into real and nominal
-monetary neutrality is the property that changes money supply and only affects
nominal variables, not real variables
-used for long-run description of the economy
Monetary Neutrality *if the money supply doubles
-prices, wages and all dollar values double
-real output, employment, real interest rates, and real wages remain unchanged
-money is unlikely to be neutral in the short run, but it is likely to be neutral in the
long run
Nominal Variables -those variables measured in monetary units
-effected by changes in th emoney supply
Real Variables those variables measured in physical units
Short-run Economy -changes in nominal variables such as money and prices impact real variables
-nominal and real variables are not independent
-changes in money can temporarily move real GDP away from its long-run trend
Model of Aggregate Supply and Aggregate Demand -used to explain short-run economic fluctuations around the economies long-run
trend
-the price level (measured by the CPI/ GDP deflator) is graphed on the vertical
axis
-real GDP is graphed on the horizontal axis
-the price level and output adjust to balance aggregate supply and demand
Aggregate-Supply Curve shows the quantity of goods and services that firms are willing to produce and
sell at each price level
Aggregate-Supply Curve Short-Run has an upward (positive) slope because a change in the price level causes output
to deviate from its long-run level for a short period of time
Sticky-Wage Theory (1) *suppose firms/workers agree on a nominal wage contract based on the
expected price level
-if the price level falls below what the expected level firms pay the same wage
but receive lower prices for their output
-this reduces profits and causes the firm to hire less people and reduces the
quantity of goods and services supplied
Menu Cost the cost associated with firms changing prices
Recession -a period of mildly falling incomes and rising unemployment ex. 2007-2009
-caused by a leftward shift in aggregate demand and a leftward shift in aggregate
supply
Depression a severe period of falling incomes and rising unemployment ex. Great Depression
, The Business Cycle the short-run fluctuations of the economy
Economic Fluctuations -are irregular and unpredictable
-most macroeconomic variables measuring income, spending, or production
move in the same direction
When Output Falls, Unemployment Rises when real GDP declines the rate of unemployment rises because when firms
produce fewer goods and services, they lay off workers
Classical Dichotomy -the separation of economic variables into real and nominal
-monetary neutrality is the property that changes money supply and only affects
nominal variables, not real variables
-used for long-run description of the economy
Monetary Neutrality *if the money supply doubles
-prices, wages and all dollar values double
-real output, employment, real interest rates, and real wages remain unchanged
-money is unlikely to be neutral in the short run, but it is likely to be neutral in the
long run
Nominal Variables -those variables measured in monetary units
-effected by changes in th emoney supply
Real Variables those variables measured in physical units
Short-run Economy -changes in nominal variables such as money and prices impact real variables
-nominal and real variables are not independent
-changes in money can temporarily move real GDP away from its long-run trend
Model of Aggregate Supply and Aggregate Demand -used to explain short-run economic fluctuations around the economies long-run
trend
-the price level (measured by the CPI/ GDP deflator) is graphed on the vertical
axis
-real GDP is graphed on the horizontal axis
-the price level and output adjust to balance aggregate supply and demand
Aggregate-Supply Curve shows the quantity of goods and services that firms are willing to produce and
sell at each price level
Aggregate-Supply Curve Short-Run has an upward (positive) slope because a change in the price level causes output
to deviate from its long-run level for a short period of time
Sticky-Wage Theory (1) *suppose firms/workers agree on a nominal wage contract based on the
expected price level
-if the price level falls below what the expected level firms pay the same wage
but receive lower prices for their output
-this reduces profits and causes the firm to hire less people and reduces the
quantity of goods and services supplied
Menu Cost the cost associated with firms changing prices
