Econ ch. 6 quiz

Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices?

Firms respond to short-term demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels.

Which of the following statements best describes price flexibility in the economy?

Prices tend to be sticky in the short run but become more flexible over time.

Refer to the graphs. Suppose a firm is currently producing 500 computers per week and charging a price of $1,000. What happens to the firm's inventory of computers if there is a positive demand shock and prices are flexible?

The firm's inventory will stay at their current level.

Why do economists consider unemployment to be undesirable?

Unemployment is wasteful because we lose all the goods and services that unemployed workers could have produced if they had been working.

Why do firms prefer to use changes in inventories instead of changes in output to alleviate unexpected shocks?

Using changes in inventories allows production to proceed smoothly and constantly at the optimal output level of lowest per-unit costs, even when demand is variable.

If prices of goods and services were inflexible, then

a positive demand shock would lead to increased real GDP in the short run.

Suppose that Glitter Gulch, a gold mining firm, increased its sales revenues on newly mined gold from $100 million to $200 million between one year and the next.

a. 0 percent b. 100 million

Refer to the figures below and assume that price is fixed at $37,000 and that Buzzer Auto needs 5 workers for every 1 automobile produced.

a. 900 cars b. 4,500 workers hired c. fewer cars would be 200 d. fewer workers would be 1000

Today, living standards in the richest nations of the world are

about 50 times higher than living standards in the poorest nations of the world

Prices

of most consumer products are rather sticky.

Which of the following is the best example of investment as defined by economists?

A restaurant owner buys a new commercial freezer for storing ingredients for meals.

Which of the following is the best example of economic investment?

A construction company buys new landmoving equipment.

Suppose a firm is currently producing 900 computers per week and charging a price of $1,200 per computer. Demonstrate how the firm will respond to a negative demand shock. Assume prices are flexible.

Real GDP will stay the same, prices will decrease, and unemployment will stay the same.

Savings are generated whenever

current income exceeds current spending.

Refer to the figure. Assuming this market is representative of the economy as a whole, this economy

faces fluctuating output levels whenever there is a demand shock.

If an economy has sticky prices, and demand unexpectedly increases, you would expect the economy's real GDP to:

increase

Camille's Cakes produced 600 cakes one year that sold for $30 each. The next year Camille's again produced 600 cakes (identical to the previous year's cakes) but sold them for $35 each. Based on this information, we can conclude that Camille's production of cakes for the next year

increased nominal GDP by $3,000 but left real GDP unchanged.

A price war

is possible when a firm has just one or two major rivals.

If consumers become pessimistic, the economy is likely to experience a

negative demand shock

Which of the following is most closely related to recessions?

negative real growth in output

Suppose that real GDP increases by 8 percent while the population of a country increases by 7 percent. In this situation,

output per person necessarily increases.

An increase in _________blank GDP guarantees that more goods and services are being produced by an economy.

real

In macroeconomic models, prices are assumed to be completely inflexible in

the very short run only.

Economists and policy makers are committed to encouraging a high and growing level of real GDP because

this means greater consumption opportunities.

Inflexible prices

will cause manufacturing firms to use inventories as a way to deal with demand shocks.