Question 1

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 always adjust in perfect competition, but this is not a reason why some firms do not instantly adjust prices in response to changes in demand. The other choices are all valid reasons why firms may not adjust prices immediately.

Question 2

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

Accepted Answer

The short-run aggregate supply curve becomes steeper when a greater proportion of firms have flexible prices, as these firms can adjust their prices more quickly in response to changes in demand or cost conditions, reducing the overall price stickiness in the economy.

Question 3

Each of the two 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)expectations are formed adaptively rather than rationally.
C)firms confuse changes in the overall level of prices with changes in relative prices.
D)the real wage adjusts to bring labor supply and labor demand into equilibrium.

Accepted Answer

The sticky-price model is based on the assumption that some firms do not adjust their prices instantly to changes in demand. This can be due to menu costs, contractual agreements, or other reasons that prevent firms from frequently adjusting their prices. As a result, changes in demand will initially affect output rather than prices in the short-run.

Question 4

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

In the sticky-price model, some firms announce their prices in advance, while others set their prices in accordance with observed prices and output. This heterogeneity in pricing behavior allows for some prices to adjust immediately to changes in demand or supply while others remain unchanged for a period of time.

Question 5

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

In the imperfect-information model, if the producer expects the price level to rise, they have already adjusted their expectations, so there is no surprise, and production remains unchanged.

Question 6

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 7

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 the short-run aggregate supply curve can shift due to temporary misperceptions about prices by firms. This means that in the short run, firms may mistakenly believe that an increase or decrease in the aggregate price level is a change in the relative price of their specific product and change their output accordingly. However, once they realize their mistake and adjust their prices, the long-run aggregate supply curve returns to its original position. This phenomenon is not related to sticky wages, sticky prices, or procyclical real wages.

Question 8

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

The sticky-price model suggests that output deviates from its natural level when actual prices differ from expected prices. Therefore, when the actual price level equals the expected price level, output will be at its natural level, as firms' expectations are aligned with reality, allowing them to set prices appropriately.

Question 9

Both models of aggregate supply discussed in Chapter 13 imply that if the price level is higher than expected, then output natural rate 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 produce more because they perceive higher prices as an increase in demand, leading to output exceeding the natural rate.

Question 10

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...

Question 11

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

Lucas found that countries where both aggregate demand and prices are most stable have the biggest effect on output. This suggests that stable macroeconomic conditions are essential for sustained economic growth.

Question 12

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 not
C)related to
D)equal to

Accepted Answer

The sticky-price model assumes that prices are "sticky," meaning they do not adjust immediately to changes in supply and demand. Therefore, when there is a deviation of output from the natural level (i.e. unemployment or inflation), it is assumed to be caused by a deviation in the price level from the expected price level. Specifically, a negative output gap (where GDP is below potential) is associated with a lower than expected price level, while a positive output gap (where GDP exceeds potential) is associated with a higher than expected price level. Therefore, deviations of output and the price level are positively associated in the sticky-price model.

Question 13

Each of the two 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 labor supply and labor demand into equilibrium.

Accepted Answer

In the imperfect-information model, the market imperfection is that firms confuse changes in the overall level of prices with changes in relative prices. This confusion leads to adjustments in production levels based on incorrect perceptions of real prices.

Question 14

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 15

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, only a certain proportion of firms are able to adjust their prices in response to changes in demand. This means that changes in output will have a greater effect on the price level when fewer firms have flexible prices. Hence, the relationship between output and the price level depends on the proportion of firms with flexible prices.

Question 16

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...

Question 17

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 the short-run aggregate supply curve steeper because firms must adjust their prices more frequently in response to changes in input prices and wages. This means that there is less room for them to adjust output in the short-run, making the supply curve steeper.

Question 18

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

Accepted Answer

Both models of aggregate supply suggest that when the price level is lower than expected, firms produce less because they are receiving lower prices for their goods than anticipated, leading to output falling below the natural rate of output.

Question 19

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 20

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...

Quiz 13: Saving, Investment, and the Financial System

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

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

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

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:

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

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

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

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

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

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

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

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

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

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

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