Suppose That Prices Are Sticky in the Short-Run

question 124

Multiple Choice

Suppose that prices are sticky in the short-run. Which of the following best describes the economy's response to a negative demand shock?

• A) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will increase.
• B) Firms' inventories will decrease, causing them to increase production. Ultimately, real GDP will increase and unemployment will decrease.
• C) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will increase and unemployment will increase.
• D) Firms' inventories will increase, causing them to cut production. Ultimately, real GDP will decrease and unemployment will decrease.

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