1 . Explaining short-run economic fluctuations

Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run.

For example, an increase in the money supply, a___(nominal, real) variable, will cause the price level, a___(nominal, real), to increase but will have no long-run effect on the quantity of goods and services the economy can produce, a__(nominal, real). The distinction between real variables and nominal variables is known as____ (price neutrality, the classical dichotomy, the quantity theory).

In the short run, however, 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) diagram?it needs appropriate labels for the axes and curves. You will identify some of the missing labels in the questions that follow.