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) If prices are sticky, then a negative demand shock will lead to A. a short-run

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Question

) If prices are sticky, then a negative demand shock will lead to A. a short-run increase in real GDP C. a long-run increase in real GDP B. a short-run decrease in real G D. a long-run decrease in real GDP 2) If prices are sticky, positive demand shock in the long-run leads to A. no change in unemployment C. a decrease in unemployment B. an increase in unemployment D. an unpredictable change in unemployment ) If prices are flexible, negative demand shock will lead to A. Inflation C. decrease in inventories B. Deflation D. increase in inventories If prices are flexible, positive demand shock will lead to A. Inflation C. decrease in inventories B. Deflation D. increase in inventories 5) If prices are sticky, short-run consequences of negative demand shock is B. decrease in real GDP A. increase in real GDP C. decrease in inventories D. increase in inventories ) If prices are sticky, short-run consequences of positive demand shock is A. increase in real GDIP C. decrease in inventories B. decrease in real GDP D. increase in inventories

Explanation / Answer

1. If prices are sticky, then a negative demand shock will lead to

b. short-run decrease in real GDP. As demand declines with price remaining the same.

2. If prices are sticky, positive demand shock in the long-run leads to

c. Decrease in unemployment. Higher quantity demanded in the long-run would imply increase in output and higher employment.

3. If prices are flexible, negative demand shock will lead to

b. Deflation. Since a decline in demand will be associated with decline in prices and a new equilibrium point at a lower price.

4. If prices are flexible, positive demand shock will lead to

a. Inflation. As demand surges, prices will increase and the result will be inflation.

5. If prices are sticky, short-run consequences of a negative demand shock is

d. Increase in Inventories. Since demand declines and prices remain the same, the result is an incrrease in inventories.

6. If prices are sticks, short-run consequences of positive demand shock is

c. Decrease in inventories. The prices remain the same even as demand surges. This results in decline in inventory.

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