The IA line does not shift in the short run because
A)real and potential GDP are not equal.
B)potential GDP does not change.
C)of expectations and staggered wage and price adjustment.
D)real GDP does not change.
E)there is no spending balance.

Question

Quizplus · Accepted Answer

The IA (investment-demand curve and aggregate demand curve) line does not shift in the short run because of expectations and staggered wage and price adjustment. This means that in the short run, prices and wages are sticky and do not adjust immediately to changes in demand. As a result, any changes in demand (such as changes in government spending, taxes, or exports) will primarily affect output and employment in the short run, rather than prices. This is why the IA line remains fixed in the short run. Choices A, B, D, and E are incorrect because they do not explain why the IA line does not shift in the short run.

The IA Line Does Not Shift in the Short Run