According to the New Classical theory, why may output differ from its full-employment level in the short run?
What will be an ideal response?
When the actual price level is greater than the expected price level, firms increase output. When the actual price level is less than the expected price level, firms decrease output. As a result, output can be higher or lower than the full employment level in the short run—until firms can distinguish changes in relative prices from changes in the general price level. than the expected price level, firms increase output.
You might also like to view...
Which of the following will lead to a decrease in the firm's short-run demand for labor?
A) an increase in the price of the final product B) an increase in price of the final product's substitute good C) a decline in labor productivity D) an increase in the number of buyers for the final product
The model of aggregate demand and aggregate supply can NOT be used to:
A. discuss the pros and cons of income tax cuts. B. evaluate a tax cut's effect on short run economic fluctuations. C. assess a tax cut's effect on longer run issues such as the national debt. D. to discuss income distribution.
Agreements to abolish most barriers to trade among nations are known as:
a. free trade cartels. b. discriminatory trade agreements. c. neutral trade agreements. d. preferential trade agreements. e. retaliatory trade agreements.
Spending VCU4 on real-world goods and services causes the nation's:
a. Monetary base to fall. b. M2 money supply to fall. c. M2 money multiplier to remain the same. d. M2 money supply to rise.