Incomplete short-run aggregate demand (AD) and aggregate supply (AS) diagram-it needsĪppropriate labels for the axes and curves. Short-run fluctuations around the long-run output level. In the short run, however, most economists believe that real and nominal variables are intertwined.Įconomists use the model of aggregate demand and aggregate supply to examine the economy's MostĮconomists accept monetary neutrality as a description of how the economy works in the long run, but The quantity of output, employment, real wages, and real interest rates, will be unaffected. Will cause the price level and nominal wages to increase proportionately, but real variables, such as Money supply affect nominal variables but not real variables. Monetary neutrality is the proposition of classical macroeconomic theory that changes in the Nominal variables, such as the quantity of money or the price level, are measured in terms ofĭollars. Service produced in an economy or the number of units of one good a unit of another good can buy. Real variables measure quantities of goods and services, such as the quantity of a particular good or Of money will impact the price level but not the output level is known as monetary neutrality. The notion that an increase in the quantity Services the economy can produce, a real variable. Nominal variable, to increase but will have no long-run effect on the quantity of goods and Independently of each other in the long run.įor example, an increase in the money supply, a nominal variable, will cause the price level, a Most economists believe that real economic variables and nominal economic variables behave

Explaining short-run economic fluctuations

Supply inshort run