Contrast why negative supply shocks are more challenging for policy makers than negative demand shocks.
What will be an ideal response?
Student responses will vary. A sample answer follows. After a negative demand shock, policy makers can employ expansionary fiscal and/or monetary policy that can help shift the economy back to its original position. A supply shock is different. If policy makers use expansionary fiscal or monetary policy in response to a supply shock, output increases but inflation goes even higher. Using contractionary policies drives down inflation but drives up unemployment. Thus, a supply shock forces policy makers to make difficult choices.
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Even though it often does not result in profit maximization, some small firms use a cost-plus pricing strategy anyway because
A) they sell several products, each of which sells for a different price. The time and expense involved in finding the profit-maximizing price for each product are not worth the effort. B) they do not understand what marginal revenue and marginal cost mean. C) it is easy to use. D) it is expensive to hire an economist who can determine what the profit-maximizing price is.
The volume of U.S. debt in absolute terms was the highest during the period:
a. 1995–2000. b. 1945–1950. c. 2010–2014. d. 1975–1980.
Because many resource prices are set by long-term contracts, in the short run
a. costs will increase by more than product prices when demand increases. b. costs will decrease when the demand for products increases. c. costs will increase by less than product prices when demand increases. d. costs will decrease by more than product prices when demand decreases.
Which statement is true?
A. Nations should strive for self-sufficiency. B. The U.S. balance of trade has always been positive. C. Our biggest trade deficit was a little over $150 billion. D. Our balance of trade turned negative in the mid-1970s.