Question 1

Each of the three models of short-run aggregate supply is based on some market imperfection.In the sticky-price model,the imperfection is that:
A) some firms do not adjust their prices instantly to changes in demand.
B) contracts and arrangements may prevent nominal wages from adjusting rapidly to changing economic conditions.
C) firms confuse changes in the overall level of prices with changes in relative prices.
D) the real wage adjusts to bring labour supply and labour demand into equilibrium.

Accepted Answer

The sticky-price model assumes that some firms do not adjust their prices instantly to changes in demand, which creates a market imperfection. This model suggests that in the short-run, changes in output and employment are mainly driven by changes in demand, rather than changes in prices. Therefore, if demand increases, firms cannot instantly increase prices and will instead increase output and employment to meet the demand.

Question 2

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except:
A) it is costly to alter prices.
B) they do not want to annoy their frequent customers.
C) prices do not adjust when there is perfect competition.
D) some prices are set by long-term contracts between firms and customers.

Accepted Answer

Prices do not adjust when there is perfect competition is incorrect, as in perfect competition, prices adjust immediately to changes in demand. All other options are valid reasons why firms may not adjust prices immediately.

Question 3

The higher the average rate of inflation,the more frequently firms must adjust their prices,which implies that a high rate of inflation:
A) has no effect on the slope of the short-run aggregate supply curve.
B) should make the short-run aggregate supply curve flatter.
C) makes the short-run aggregate supply curve steeper.
D) causes prices to be sticky.

Accepted Answer

A high rate of inflation makes prices more volatile and unstable. This means that firms will have to adjust prices more frequently, leading to a steeper short-run aggregate supply curve.

Question 4

Each of the three models of short-run aggregate supply is based on some market imperfection.In the imperfect-information model,the imperfection is that:
A) some firms do not adjust their prices instantly to changes in demand.
B) contracts and arrangements may prevent nominal wages from adjusting rapidly to changing economic conditions.
C) firms confuse changes in the overall level of prices with changes in relative prices.
D) the real wage adjusts to bring labour supply and labour demand into equilibrium.

Accepted Answer

In the imperfect-information model, firms may confuse changes in the overall price level with changes in relative prices, leading to suboptimal production decisions.

Question 5

According to the sticky-price model:
A) all firms announce their prices in advance.
B) all firms set their prices in accord with observed prices and output.
C) some firms set their prices according to the aggregate supply equation.
D) some firms announce their prices in advance,and some firms set their prices in accord with observed prices and output.

Accepted Answer

According to the sticky-price model, some firms announce their prices in advance and some firms set their prices in accord with observed prices and output. This means that there is a mixture of both predetermined prices and prices set in response to market conditions, which results in sticky prices that do not adjust immediately to changes in supply and demand.

Question 6

According to the imperfect-information model,when the price level rises and the producer expects the price level to rise,the producer:
A) increases production.
B) does not change production.
C) decreases production.
D) hires more workers.

Accepted Answer

The answer of According to the imperfect-information model,when the price...

Question 7

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:
A) real wages and nominal wages.
B) the overall level of prices and relative prices.
C) the overall level of prices and the expected level of prices.
D) cost-push inflation and demand-pull inflation.

Accepted Answer

The imperfect-information model posits that producers may struggle to differentiate between changes in the overall level of prices and changes in relative prices. This difficulty arises because they might not have complete information about the prices of all goods and services in the economy, leading to potential misinterpretations of price signals.

Question 8

According to the sticky-price model,other things being equal,the greater the proportion,s,of firms that follow the sticky-price rule,the ______ the ______ in output in response to an unexpected price increase.
A) greater; increase
B) smaller; increase
C) greater; decrease
D) smaller; decrease

Accepted Answer

The answer of According to the sticky-price model,other things being...

Question 9

The basic aggregate supply equation implies that output exceeds natural output when the price level is:
A) low.
B) high.
C) less than the expected price level.
D) greater than the expected price level.

Accepted Answer

The answer of The basic aggregate supply equation implies that...

Question 10

According to the imperfect-information model,when the price level is greater than the expected price level,output will ______ the natural level of output.
A) be greater than
B) be less than
C) equal
D) shift the

Accepted Answer

In the imperfect-information model, when the actual price level exceeds the expected price level, producers mistakenly perceive this as an increase in the relative price of their goods, leading them to increase production. Thus, output will be greater than the natural level of output.

Question 11

Both models of aggregate supply discussed in Chapter 13 imply that if the price level is higher than expected,then output ______ natural level of output.
A) exceeds the
B) falls below the
C) equals the
D) moves to a different

Accepted Answer

When the price level is higher than expected, firms see higher prices for their products, leading them to increase production, causing output to exceed the natural level.

Question 12

According to the imperfect-information model,in countries in which there is a great deal of variability of prices:
A) the response of output to unexpected changes in prices will be relatively large.
B) the response of output to unexpected changes in prices will be relatively small.
C) output will respond negatively to an unexpected rise in prices.
D) output will not respond to an unexpected change in prices.

Accepted Answer

The answer of According to the imperfect-information model,in countries in...

Question 13

The short-run aggregate supply curve is drawn for a given:
A) output level.
B) price level.
C) expected price level.
D) level of aggregate demand.

Accepted Answer

The short-run aggregate supply curve is drawn for a given expected price level, as it reflects how much output producers are willing to supply at different price levels, assuming the expected price level (and other factors like wages and resource prices) is constant.

Question 14

The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on:
A) sticky wages.
B) sticky prices.
C) temporary misperceptions about prices.
D) procyclical real wages.

Accepted Answer

The imperfect-information model suggests that in the short run, firms may have temporary misperceptions about the general price level, leading them to set the wrong price for their products. In the long run, they will adjust their prices to the level consistent with their production costs and the overall price level, resulting in a vertical long-run aggregate supply curve. This is different from the sticky wage and price models, which argue that wages or prices are slow to adjust downward in response to changes in demand or supply shocks, respectively. The procyclical real wage hypothesis is also a separate theory that suggests real wages tend to increase during economic expansions and decrease during contractions.

Question 15

According to the sticky-price model,output will be at the natural level if:
A) firms expect a high price level and the demand for goods is high.
B) the proportion of firms with flexible prices equals the proportion of firms with sticky prices.
C) the price level equals the expected price level.
D) expectations are formed adaptively,but not if expectations are formed rationally.

Accepted Answer

In the sticky-price model, output will be at the natural level when the price level equals the expected price level. This is because firms do not adjust their prices immediately in response to changes in demand or supply, but rather they adjust their prices gradually over time. Therefore, if the price level is at the expected level, there will be no incentive for firms to adjust their prices and the output will be at the natural level.

Question 16

Based on the sticky-price model,the short-run aggregate supply curve will be steeper,the greater the:
A) target nominal-wage rate.
B) target real-wage rate.
C) proportion of firms with flexible prices.
D) proportion of firms with sticky prices.

Accepted Answer

The answer of Based on the sticky-price model,the short-run aggregate...

Question 17

In the sticky-price model,the relationship between output and the price level depends on:
A) the proportion of firms with flexible prices.
B) the target real wage rate.
C) the target nominal wage rate.
D) the implicit agreements between workers and firms.

Accepted Answer

In the sticky-price model, firms have either flexible prices or sticky prices. The output and price level relationship depends on the proportion of firms with flexible prices. If there are more firms with flexible prices, then changes in output will have a larger effect on the price level. On the other hand, if there are more firms with sticky prices, changes in output will have a smaller effect on the price level. Therefore, the correct answer is choice letter A.

Question 18

According to the imperfect-information model,when the price level falls but the producer did not expect it to fall,the producer:
A) increases production.
B) does not change production.
C) decreases production.
D) hires more workers.

Accepted Answer

According to the imperfect-information model, when the price level falls unexpectedly, producers may mistake this for a relative decrease in the price of their specific product rather than a general decrease in the price level. As a result, they might believe their goods are less valuable relative to others and decrease production in response.

Question 19

According to the sticky-price model,deviations of output from the natural level are _____ deviations of the price level from the expected price level.
A) positively associated with
B) negatively associated with
C) not related to
D) equal to

Accepted Answer

According to the sticky-price model, prices are slow to adjust to changes in demand or supply, leading to temporary deviations of output from the natural level. These deviations are positively associated with deviations of the price level from the expected price level.

Question 20

After examining international data,the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand:
A) and prices are most stable.
B) and prices are most variable.
C) is most stable but prices are most variable.
D) is most variable but prices are most stable.

Accepted Answer

According to Robert Lucas, aggregate demand has the biggest effect on output in countries where aggregate demand and prices are most stable.

Quiz 13: Aggregate Supply and the Short-Run

Each of the three models of short-run aggregate supply is based on some market imperfection.In the sticky-price model,the imperfection is that:

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of the following reasons except:

The higher the average rate of inflation,the more frequently firms must adjust their prices,which implies that a high rate of inflation:

Each of the three models of short-run aggregate supply is based on some market imperfection.In the imperfect-information model,the imperfection is that:

According to the sticky-price model:

According to the imperfect-information model,when the price level rises and the producer expects the price level to rise,the producer:

The imperfect-information model assumes that producers find it difficult to distinguish between changes in:

According to the sticky-price model,other things being equal,the greater the proportion,s,of firms that follow the sticky-price rule,the the in output in response to an unexpected price increase.

The basic aggregate supply equation implies that output exceeds natural output when the price level is:

According to the imperfect-information model,when the price level is greater than the expected price level,output will ______ the natural level of output.

Both models of aggregate supply discussed in Chapter 13 imply that if the price level is higher than expected,then output ______ natural level of output.

According to the imperfect-information model,in countries in which there is a great deal of variability of prices:

The short-run aggregate supply curve is drawn for a given:

The imperfect-information model bases the difference in the short-run and long-run aggregate supply curve on:

According to the sticky-price model,output will be at the natural level if:

Based on the sticky-price model,the short-run aggregate supply curve will be steeper,the greater the:

In the sticky-price model,the relationship between output and the price level depends on:

According to the imperfect-information model,when the price level falls but the producer did not expect it to fall,the producer:

According to the sticky-price model,deviations of output from the natural level are _____ deviations of the price level from the expected price level.

After examining international data,the economist Robert Lucas found that aggregate demand has the biggest effect on output in countries where aggregate demand: