ASU ECON 211 FINAL EXAM REVIEW
QUESTIONS AND CORRECT
SOLUTIONS +
⩥ Depression. Answer: a severe period of falling incomes and rising
unemployment ex. Great Depression
⩥ The Business Cycle. Answer: the short-run fluctuations of the
economy
⩥ Economic Fluctuations. Answer: -are irregular and unpredictable
-most macroeconomic variables measuring income, spending, or
production move in the same direction
⩥ When Output Falls, Unemployment Rises. Answer: when real GDP
declines the rate of unemployment rises because when firms produce
fewer goods and services, they lay off workers
⩥ Classical Dichotomy. Answer: -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. Answer: *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. Answer: -those variables measured in monetary
units
-effected by changes in th emoney supply
⩥ Real Variables. Answer: those variables measured in physical units
⩥ Short-run Economy. Answer: -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. Answer: -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. Answer: shows the quantity of goods and
services that firms are willing to produce and sell at each price level
⩥ Aggregate-Supply Curve Short-Run. Answer: 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). Answer: *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. Answer: the cost associated with firms changing prices
QUESTIONS AND CORRECT
SOLUTIONS +
⩥ Depression. Answer: a severe period of falling incomes and rising
unemployment ex. Great Depression
⩥ The Business Cycle. Answer: the short-run fluctuations of the
economy
⩥ Economic Fluctuations. Answer: -are irregular and unpredictable
-most macroeconomic variables measuring income, spending, or
production move in the same direction
⩥ When Output Falls, Unemployment Rises. Answer: when real GDP
declines the rate of unemployment rises because when firms produce
fewer goods and services, they lay off workers
⩥ Classical Dichotomy. Answer: -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. Answer: *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. Answer: -those variables measured in monetary
units
-effected by changes in th emoney supply
⩥ Real Variables. Answer: those variables measured in physical units
⩥ Short-run Economy. Answer: -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. Answer: -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. Answer: shows the quantity of goods and
services that firms are willing to produce and sell at each price level
⩥ Aggregate-Supply Curve Short-Run. Answer: 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). Answer: *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. Answer: the cost associated with firms changing prices
