Question

Question 1. What is the difference between the short-run and the long-run?

Question 2. Explain the concepts of shocks in aggregate demand and aggregate supply.

Question 3. What is stabilization policy?

Question 4. Explain the impact of an increase in the money supply in the short-run and in the long run

Question 5. Which of the following changes would contribute to a decline in the index of leading indicators suggesting that a recession is more likely?

a. A rise in stock prices

b. A rise in building permits

c. A decline in initial claims for unemployment insurance

d. A decline in the slope of the yield curve

Question 6. An expansion in aggregate demand increases _____________in the short-run. In the longrun, however, it increases only the ______________

a. Real GDP, price level

b. Real GDP, velocity of money

c. The unemployment rate, price level

d. The unemployment rate, velocity of money

Answer 1

Question 1

Short-run or long-run are stated in terms of ability of a firm to change its factors of production as production changes.

There is no particular quantum of time period that can be designated as short-run or long-run.

Short-run refers to the period related to the production in which some factors remain constant while other factors can be changed. Factors that remain constant are called fixed factors while factors that changes are called variable factors.

In other words, in short-run, factors can be divided in to two - fixed factors and variable factors. Production in short-run is increased only by increasing the quantity of variable factors while there is no change in the quantity of fixed factors.

Long-run refers to the period related to the production in which all factors can be changed. In long-run, all factors are variable.

In other words, in long-run, all factors of production can be changed as the production changes.