Question 1

Which of the following statements about price stickiness or flexibility is true?
A) Prices of many raw materials are less flexible than the prices of final goods and services
B) Prices of many raw materials are much more flexible than the prices of final goods and services
C) Prices of many raw materials are about as flexible as the prices of final goods and services
D) Prices of many raw materials are only slightly more flexible than the prices of final goods and services

Accepted Answer

Prices of many raw materials are much more flexible than the prices of final goods and services. This is because raw material prices are usually determined by global commodity markets that are highly competitive and subject to rapid changes in supply and demand. On the other hand, prices of final goods and services are often constrained by factors such as brand loyalty, market power, and menu costs, which make them more sticky or resistant to change.

Question 2

Between 2007 and 2009, the unemployment rate in the U.S.:
A) Fell from 6% to 4.5%
B) Rose from 4.7% to 10%
C) Rose slightly from 5.5% to 7%
D) Remained stagnant at about 7%

Accepted Answer

The unemployment rate rose from 4.7% in 2007 to 10% in 2009 due to the global financial crisis and the Great Recession.

Question 3

Real GDP can change due to changes in the price level.

Accepted Answer

Real GDP is adjusted for changes in the price level, meaning it measures the value of goods and services produced in an economy at constant prices, thus isolating the effect of inflation or deflation.

Question 4

Economists are sharply divided over how to best fight the Great Recession. The majority of economists favor the "Stimulus Solution," which involves:
A) Relying on the invisible hand of the market to set things right
B) Government actions to increase the total demand for output in the economy
C) Making prices become more flexible so that equilibrium can be attained once more
D) Stimulus from abroad through international trade and treaties

Accepted Answer

The "Stimulus Solution," which involves government actions to increase total demand for output in the economy, is the favored approach by the majority of economists to fight the Great Recession. This involves government spending on infrastructure projects, tax cuts, and other measures to increase the purchasing power of consumers and businesses, which in turn stimulates economic growth. The other options presented are not supported by the majority of economists as effective ways to fight the recession.

Question 5

Economists are sharply divided over how to best fight the Great Recession. A vocal minority of economists favor the "Structural Solution," arguing that the economy needs to undergo some structural adjustments and:
A) Relying on the invisible hand of the market to reallocate resources, by letting weak firms die out quickly
B) Government taking serious actions to increase the total demand for output in the economy
C) Fixing prices so that consumers can afford the basic stuff they need, and also to control inflation
D) Setting up social programs and welfare structures, to help out those who are suffering most from the recession

Accepted Answer

The Structural Solution argues that allowing weak firms to die out quickly will reallocate resources more efficiently, ultimately leading to a stronger and more sustainable economy. This approach focuses on addressing underlying structural issues, rather than just temporarily boosting demand through government intervention.

Question 6

The Great Recession of 2007-09 illustrated the situation where a negative demand shock occurred and:
A) Prices adjusted but the output level was inflexible
B) The economy's overall price level was very flexible
C) The economy's overall price level was "sticky"
D) Prices and production were both "sticky" or inflexible

Accepted Answer

The Great Recession showed that the economy's overall price level was "sticky," meaning that prices were slow to adjust to changes in demand. This led to a situation where both prices and production were "sticky" or inflexible, as businesses were hesitant to lower prices in fear of harming their profitability, and were therefore slow to adjust their output levels.

Question 7

Which of the following markets is most likely to exhibit extremely flexible prices?
A) The oil market
B) The market for taxi services
C) The market for newspapers
D) The market for coin-operated laundry

Accepted Answer

The answer of Which of the following markets is most...

Question 8

Explanations about what caused the Great Recession differ sharply among economists. The so-called Minsky Explanation involves the following factors, except:
A) A massive euphoric bubble in housing prices that eventually burst
B) A huge negative demand shock in the economy
C) Flexible average price level in the economy
D) Excessive access to home-mortgage loans

Accepted Answer

The Minsky Explanation does not involve a flexible average price level in the economy. It focuses on the other factors listed, including the housing bubble, negative demand shock, and excessive access to home-mortgage loans.

Question 9

Which of the following statements about price wars is true?
A) Firms that have to deal with the possibility of price wars often have extremely flexible prices.
B) Firms that do not have to deal with the possibility of price wars often have sticky prices.
C) Price wars tend to increase the short-run flexibility of prices.
D) Firms that have to deal with the possibility of price wars often have sticky prices.

Accepted Answer

Price wars can lead to firms engaging in price undercutting, which can result in reduced profits and potentially drive weaker players out of the market. To avoid entering such a war, firms may choose to maintain their prices at a fixed level, resulting in sticky prices.

Question 10

Price wars among firms:
A) Tend to reduce short-run price stickiness because firms know they can lower their own prices without rival firms lowering their prices
B) Occur when one firm lowers its price and rival firms react by lowering their prices
C) Occur when firms use advertising to take customers away from rival firms
D) Have no impact on the degree of short-run price stickiness

Accepted Answer

Price wars occur when one firm lowers its price and then rival firms react by lowering their prices. This often results in a cycle of price decreases until one or more firms reach a point where price cuts are no longer financially feasible. This can lead to reduced short-run price stickiness as firms may be more responsive to changes in market conditions when price wars are occurring.

Question 11

Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a positive demand shock?
A) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.
B) Firms' inventories will decrease, causing them to increase production. Ultimately, real GDP will increase and unemployment will decrease.
C) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will increase and unemployment will increase.
D) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will decrease.

Accepted Answer

Sticky prices refer to a situation where prices do not adjust immediately to changes in demand or supply. In the short run, a positive demand shock (increase in demand) will lead to an increase in sales for firms, causing inventories to decrease. Firms will respond by increasing production to restock their inventories. This increase in production will lead to an increase in real GDP and a decrease in unemployment as firms hire additional workers to meet the increased demand. Therefore, option B is the correct choice.

Question 12

Which of the following is NOT a factor that increases short-run price stickiness?
A) Consumers tend to prefer stable prices
B) Stable prices make it easier for consumers to plan their spending
C) A firm can lower its price without fear that rival firms will also lower their prices
D) Firms try to avoid price wars

Accepted Answer

The option C implies price rigidity due to oligopoly or monopolistic competition, where firms do not change their prices due to fear of retaliation from rivals. However, this would increase short-run price stickiness. Therefore, option C is the incorrect choice as it does not reduce short-run price stickiness.

Question 13

Economists need different models of the economy because:
A) The economy behaves differently depending on how much time has passed after a demand shock
B) We need a different model to analyze a positive demand shock than we need to analyze a negative demand shock
C) The way economic performance is measured of changes over time
D) Prices tend to be less flexible over time

Accepted Answer

Economists need different models because the economy's behavior can vary over different time frames after a demand shock, requiring different analytical approaches.

Question 14

Business cycles refer to short term fluctuations in prices.

Accepted Answer

Business cycles refer to short term fluctuations in economic activity, such as GDP, employment, and production, rather than just prices.

Question 15

For which of the following goods is the price least likely to be flexible?
A) Airline tickets
B) Beer
C) Milk
D) Newspapers

Accepted Answer

Newspapers typically have fixed prices due to the low cost of production and distribution, and the price is often printed on the paper itself, making it less flexible.

Question 16

In macroeconomic models, prices are assumed to be completely inflexible in:
A) The very short run only
B) The short run and remains so over time
C) The very long run
D) Situations when the changes in demand look to be permanent

Accepted Answer

Prices are assumed to be completely inflexible in the very short run only. In the short run, prices may adjust to temporary changes in demand and supply, but in the very short run, prices are assumed to be fixed due to factors such as menu costs, contract agreements or psychological pricing strategies. In the longer run, prices may adjust to changes in market conditions, but in the very long run, other factors such as technological progress, demographic changes, and institutional features may affect the economy.

Question 17

Firms that choose to use a fixed-price policy:
A) Will tend to experience larger inventory changes than firms that follow a flexible-price policy
B) Will tend to experience smaller inventory changes than firms that follow a flexible-price policy
C) Find that their inventories do not respond to demand shocks
D) Will not hold inventories

Accepted Answer

Firms that choose to use a fixed-price policy will tend to experience larger inventory changes than firms that follow a flexible-price policy because they are not able to adjust their prices in response to changes in demand. This can lead to them holding excess inventory during periods of low demand and running out of inventory during periods of high demand.

Question 18

The so-called Great Recession in the U.S.:
A) Is another name for the Great Depression
B) Was the worst economic downturn since the Great Depression
C) Was triggered by oil-supply shocks
D) Was caused by a sharp increase in the value of the U.S. dollar

Accepted Answer

The Great Recession was the worst economic downturn since the Great Depression, with a peak unemployment rate of 10% in October 2009. It was caused by a variety of factors including the collapse of the housing market, risky lending practices, and the global financial crisis. It was not triggered by oil-supply shocks or a sharp increase in the value of the U.S. dollar.

Question 19

The Great Recession of 2007-09 was triggered by a:
A) Steep rise in bond values
B) Steep decline in housing prices
C) Sharp increase in oil prices
D) Sharp decline in the value of the U.S. dollar

Accepted Answer

The Great Recession of 2007-09 was triggered by a steep decline in housing prices, which led to mortgage defaults and foreclosures, ultimately causing a collapse in the financial system.

Question 20

Explanations about what caused the Great Recession differ sharply among economists. The so-called Austrian Explanation involves the following factors, except:
A) A massive euphoric bubble in housing prices that popped
B) Government actions that kept interest rates very low for a long period
C) Excessive borrowing for consumption, construction, and investment
D) A huge negative demand shock in the economy

Accepted Answer

The answer of Explanations about what caused the Great Recession...

Quiz 6: An Introduction to Macroeconomics

Which of the following statements about price stickiness or flexibility is true?

Between 2007 and 2009, the unemployment rate in the U.S.:

Real GDP can change due to changes in the price level.

Economists are sharply divided over how to best fight the Great Recession. The majority of economists favor the "Stimulus Solution," which involves:

Economists are sharply divided over how to best fight the Great Recession. A vocal minority of economists favor the "Structural Solution," arguing that the economy needs to undergo some structural adjustments and:

The Great Recession of 2007-09 illustrated the situation where a negative demand shock occurred and:

Which of the following markets is most likely to exhibit extremely flexible prices?

Explanations about what caused the Great Recession differ sharply among economists. The so-called Minsky Explanation involves the following factors, except:

Which of the following statements about price wars is true?

Price wars among firms:

Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a positive demand shock?

Which of the following is NOT a factor that increases short-run price stickiness?

Economists need different models of the economy because:

Business cycles refer to short term fluctuations in prices.

For which of the following goods is the price least likely to be flexible?

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

Firms that choose to use a fixed-price policy:

The so-called Great Recession in the U.S.:

The Great Recession of 2007-09 was triggered by a:

Explanations about what caused the Great Recession differ sharply among economists. The so-called Austrian Explanation involves the following factors, except: