ECN 211 ASU Exam 3 With Questions and Correct Answers.

ECN 211 ASU Exam 3 With Questions and Correct Answers. Recession - ANSWER -a period of mildly falling incomes and rising unemployment ex. -caused by a leftward shift in aggregate demand and a leftward shift in aggregate supply 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 ECN 211 ASU Exam 3 With Questions and Correct Answers 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 Sticky-Price Theory (2) - ANSWER -menu costs cause some firms to resist reducing their prices when the price level unexpectedly falls -so prices are "too high" and their sales decline, causing the quantity of goods and services supplied to fall .