1 . Explaining short-run economic fluctuations

A majority of economists believe that in the long run, real economic variables and nominal economic variables behave independently of one another.

For example, an increase in the money supply, a variable, will cause the price level, a variable, to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a variable. The notion that an increase in the quantity of money will impact the price level but not the output level is known as .

However, in the short run, most economists believe that real and nominal variables are intertwined. Economists use the model of aggregate demand and aggregate supply to examine the economy's short-run fluctuations around the long-run output level. The following graph shows an incomplete short-runaggregate demand (AD) and aggregate supply (AS) diagramit needs appropriate labels for the axes and curves. In the questions that follow you will identify some of the missing labels.

VERTICAL AXISHORIZONTAL AXISADAS

The aggregate curve shows the quantity of goods and services that firms produce and sell at each price level.

The vertical axis of the aggregate demand and aggregate supply model measures the overall .