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 effecton the quantity of goods and services the economy can produce,a variable. The notion that an increase in thequantity of money will impact the price level but not the outputlevel is known as .

2. Explaining short-run economic fluctuations Most economists believe that real economic variables and nominal economic variables behave independently of each other in the long run. For example, an increase in the money supply, a no long-run effect on the quantity of goods and services the economy can produce, a quantity of money will impact the price level but not the output level is known as VERTICAL AXIS variable, will cause the price level, a 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. HORIZONTAL AXIS The aggregate AS AD (?) The vertical axis of the aggregate demand and aggregate supply model measures the overall variable, to increase but will have variable. The notion that an increase in the curve shows the quantity of goods and services that firms produce and sell at each price level. Grade It Now Save & Continue Continue without saving