Question 1

1. Key facts about economic fluctuations The graph included below approximates United States business cycles between quarter one of 1947 and quarter three of 1951. The shaded region denotes periods of six or more consecutive months of declining real gross domestic product (real GDP). 2170 2070 REAL GDP (Billions of dollars) 1970 1870 1770 1947 1948 1949 1950 1951 YEAR Source: "Current-dollar and Real GDP," Bureau of Economics Analysis, last modified May 1, 13, accessed May 15, 13, http://www.bea.govational/xls/gdplev.xls.Notice that real GDP trends upward over time but experiences ups and downs in the short run. These short-run fluctuations in real GDP are often referred to as True or False: Short-term fluctuations in real GDP are irregular and unpredictable. O True O False Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950? Check all that apply. Car sales declined. The unemployment rate declined. O Corporate profits increased. Total real income increased. Grade It Now Save & Continue2. 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-run aggregate demand (AD) and aggregate supply (AS) diagram-it needs appropriate labels for the axes and curves. In the questions that follow you will identify some of the missing labels. (?) AS VERTICAL AXIS AL HORIZONTAL AXIS The aggregate curve shows the quantity of goods and services that firms produce and sell at each price level. The horizontal axis of the aggregate demand and aggregate supply model measures the overall