Explain why the short-run supply curve is not vertical, but the long-run aggregate supply curve is vertical
Over the short run, suppliers are willing to supply more real output if the price level is increasing. This is due to the two possible explanations offered in the text: the profit effect and the misperception effect. The short-run aggregate supply curve is upward sloping, and responsive to the price level; the long-run aggregate curve is perfectly vertical and unresponsive to changes in the price level, as these two effects are absent in the long run.
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New Keynesian theorists argue that
A) price and wage adjustments in response to policy changes often overcompensate and cause further price disruptions. B) prices and wages may not be free to adjust in response to policy changes. C) unions and big business have considerable power and often choose not to change wages and prices so as to deliberately offset policy changes enacted by the government. D) the Fed and the Congress rarely do what they say they will do, so one should never listen to what they say. E) new classical rational expectations theories about how expectations are formed are completely wrong.
The level of aggregate output demanded rises when the price level falls, because the resulting decrease in the interest rate will lead to
A. higher investment spending and lower consumption spending. B. higher investment spending and higher consumption spending. C. lower investment spending and higher consumption spending. D. lower investment spending and lower consumption spending.