Over the course of the business cycle,most firms respond
A) to negative shocks by cutting wages
B) to positive shocks by raising prices
C) to negative shocks by cutting prices
D) to positive shocks by raising output
E) all of the above

Question

Quizplus · Accepted Answer

During the expansionary phase of the business cycle, firms respond to positive shocks by increasing output to meet the rising demand. Therefore, choice D is the correct answer. Choices A and C are incorrect as firms are more likely to maintain wages and prices during a negative shock to avoid angering employees and customers, respectively. Choice B may not always be true as increasing prices during a positive shock could lead to a reduction in demand, and firms may choose to maintain their current prices.

Over the Course of the Business Cycle,most Firms Respond