1. Explain why the long-run aggregate supply curve is vertical and why the short-run supply curve is close to horizontal.
2. In the short run, what happens to the unemployment rate if aggregate demand suddenly falls?
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AS is vertical due to the assumption that output can be increased in an %26quot;idle%26quot; economy without upward pressure on the price level. The SR-AS is horizontal at what is believed to be the full employment rate of output. There is only so much output that can be produced in the short run, even when we are at full employment.
If AD falls suddenly, the unemployment rate will increase at the level of spending and output drops off.
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