According to the Price Adjustment Equatio

question 30

Multiple Choice

According to the price adjustment equatio
The price adjustment line
Ê ˆ
Π = Á ˜ + π ^e + Z, Ë Y* ¯

• A) shifts up, indicating higher inflation, if real GDP was above its potential GDP last year and shifts down if real GDP was below its potential.
• B) shifts up if the expected rate of inflation p^e rises and shifts down if the expected rate of inflation falls.
• C) shifts up if there is a positive price shock positive value of Z) and shifts down if there is a negative price shock.
• D) all of the above.
• E) only a and b.

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Definitions:

Return on Investment

A measure of the profitability and efficiency of an investment, calculated as the return (or gain) from an investment relative to its cost.

Markup

An amount added to the cost price of goods to cover overhead and profit.

Absorption Costing

An accounting method that includes all direct costs and an allocated portion of fixed and variable overhead costs in the cost of a product.

Cost-plus Pricing

Setting the price of a product by adding a markup to its variable costs to ensure a margin of profit.