How does an economy adjust to demand shocks when prices are inflexible?
What will be an ideal response?
For an individual firm, if the price of a product is inflexible, a change in the demand for the product will result in a change in output to achieve equilibrium at the set price of output (horizontal supply). The quantity of output produced by the firm would change but prices would stay constant. Similarly, for the entire economy, if prices are inflexible then output and employment must fluctuate to achieve equilibrium.
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What is a dominant strategy?
What will be an ideal response?
A firm recently doubled in size and experienced a reduction in the average total cost of production, as it was able to spread its fixed costs over a larger quantity of output. Which of the following should be the correct strategy of the firm after expansion? a. The firm should continue to grow slowly to see if sustained growth leads to greater economies of scale. b. The firm should continue to
grow rapidly to see if rapid growth leads to greater economies of scale. c. The firm should continue to grow exponentially to see if exponential growth leads to greater economies of scale. d. The firm should sell off portions of the business to profit from the economies of scale already received.
The stability of consumption over the business cycle and the ability of changes in the real interest rate to redirect aggregate demand indicate that
a. government policy can improve the performance of the economy. b. market economies are inherently unstable. c. a market economy has a self-correcting mechanism that will help guide it toward full employment. d. recessions will be lengthy, and high rates of unemployment will persist for a period of time even after the economy recovers.
"Demand" is a statement of actual purchases.
Answer the following statement true (T) or false (F)