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

Explaining short-run economic fluctuations

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 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. 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. You will identify some of the missing labels in the questions that follow.

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Expert Solution

Ans

Money supply is nominal as it doesn't effect real values like output

Price level is also nominal variable

Real variable because it deals with output

This is known as classical dichotomy

Rahul Sunny answered 2 years ago

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