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Macro2 - MacroUnit2 01:24:00...

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Macro Unit 2  09/05/2010 01:24:00 1. Using the equation MV=PY as a theory of AD, how does a change in M affect  AD? Change in V?  Aggregate Demand= relationship between quantity of output demanded and  aggregate price level  An increase in M would mean an increase in nominal money balances  which  would cause AD to shift right   An increase in V (velocity of money) would decrease Y, which would cause  AD to contract, shift to the left  2. Why is the aggregate supply curve vertical in the long run and horizontal in the  short run?  In the short run, prices are sticky? Prices don’t change- regardless of output;  perfectly elastic   o Here, money affects a real variable (output) because it’s not absorbed  in the price  In the long run, output is a function of capital, labor technology, not affected  by price o Perfectly inelastic  3. Okun’s Law? According to Okun’s lsaw, how are output and unemployment  related?  Change in Y/Y= 3% -2change in U  o Indicates economy in the long run grows at 3.5%  There is an inverse relationship between output and unemployment  4. Adverse supply shock? Give 3 examples What is a positive supply shock? Cite  an example. How does a supply shock affect the AD-AS model? Explain why the Fed is  not very effective in dealing with an adverse supply shock?  Supply shock: often called a price shock; exogenous change that alters cost  of producing goods and services  o Can be adverse or favorable  Positive  o Decreased energy costs?  Adverse  o
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