Explain the reasoning behind why the long-run aggregate supply curve is vertical.
What will be an ideal response?
The key to the vertical nature of the long-run aggregate supply curve is that in the long-run wages are perfectly responsive to changes in the price level. This means that if the price level increases, employees adjust their wage demands to maintain their real wage—whereas in the case of the short-run production, a higher price level would increase because producers are receiving higher profits as prices are higher but wages remain unchanged. Since real wages are maintained in the long-run case, aggregate supply doesn’t change, as firms’ profits remain unchanged regardless of the price level. Thus the long-run aggregate supply curve is vertical.
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An economic system
a. must answer the three economic questions to the satisfaction of everyone in society b. must not allow some members of society to gain an unfair advantage when answering the three economic questions c. must choose pure capitalism to adequately answer the three economic questions d. is a set of social institutions and mechanisms organized to answer the three economic questions e. can address problems of scarcity only by embracing the social institution of private property
Which of the following describes a negative externality?
a. A third party is negatively affected by a private transaction it was not part of. b. A third party is positively affected by a private transaction it was not part of. c. A party is negatively affected by a private transaction in which it took part. d. A party is positively affected by a private transaction in which it took part.
Fiscal policy cannot be used to move the economy along the short-run Phillips curve
a. True b. False Indicate whether the statement is true or false
Which of the following statements about normative analysis is correct?
A. Normative analysis is concerned with what is. B. Normative analysis is concerned with what ought to be. C. Normative analysis should not involve value judgments. D. Normative analysis measures the costs and benefits of different courses of action.