What are five reasons for the downward price-level inflexibility, especially as it pertains to wages and prices?
What will be an ideal response?
First, there is the fear of a price war. If one business starts cutting prices then other businesses can follow suit to maintain market share. Businesses may decide to maintain prices rather than risk starting a price war. Second, there are menu costs of changing prices. Repricing or reprinting prices can be costly and be disruptive to customers. Businesses are reluctant to make such changes. Third, wage contracts will fix wages for the length of the contract period, so it is difficult to cut wages until the contract is renegotiated. Also, wages and salaries of nonunion workers are typically adjusted just once a year. Fourth, some businesses may pay efficiency wages that are designed to get the maximum work effort out of employees. Cutting such wages may cause morale problems and reduce productivity, so businesses are hesitant to make these cuts. Fifth, the minimum wage sets a legal minimum that employers must pay for low-skilled workers.
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According to the new Keynesian theory, the widespread importance of small menu costs results in variations in aggregate demand causing both
A) smaller short-run adjustments in real GDP and immediate adjustment in the price level. B) smaller short-run adjustments in real GDP and delayed adjustment in the price level. C) greater short-run adjustments in the real GDP and immediate adjustment in the price level. D) greater short-run adjustments in real GDP and delayed adjustment in the price level.
The balance of payments accounts are divided into two sections: the current account and the financial account
Indicate whether the statement is true or false
Tory applies for a line of credit which she intends to use for a once in-a-lifetime dream vacation. This transaction is subject to
a. no federal law. b. the Consumer Leasing Act. c. the Consumer Product Safety Act. d. the Truth-in-Lending Act
Which of the following is NOT an advantage of a futures contract over a forward contract?
A) reduced counterparty risk B) increased flexibility C) lower information cost D) increased liquidity