Most economists believe that real economic variables and nominal economic variab

Question

Most economists believe that real economic variables and nominal economic variables behave independently of one another in the long run. 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 affect on the quantity of goods and services the economy can produce, a_variable. The separation of real variables and nominal variables is known as In the short run, however, most economists believe that real and nominal variables are intertwined. For example, most economists believe that a decrease in the quantity of money will reduce the demand for goods and services in the short run, temporarily reducing the number of goods and services that firms produce. Eventually, prices adjust to the lower quantity of money and output returns to its long-run level. But in the short run, the change in the quantity of money pushes output away from its long-run level. The economy's long-run output level Is determined by labor, human capital, physical capital, natural resources, and technological knowledge. 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 graph below shows an Incomplete short-run aggregate demand and aggregate supply diagram-it needs appropriate labels for the axes and curves. You will Identify some of the missing labels In the questions that follow. The vertical axis of the aggregate demand and aggregate supply model measures the overall_ . The aggregate _curve shows the quantity of goods and services that firms produce and sell at each price level.

Explanation / Answer

Money supply is a nominal variable.

Price level is a nominal variable.

GDP is a real variable.

The separation of real variables and nominal variables is known as Classical macroeconomic theory.

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

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

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